Last December, the Senate approved the Setting Every Community Up for Retirement Enhancement Act, better known as the SECURE Act, and it was signed into law on December 20, 2019. The Act will mostly impact retirement accounts but touches several areas of the tax code.
So, what exactly should you know?
Required Minimum Distributions (RMD) to Begin at Age 72
For those turning age 70 ½ after December 31, 2019, the Act raised the RMD age to 72. In other words, if you reached age 70 ½ anytime in 2019, the old rules apply. The new age (72) rules apply to those turning 70 ½ on January 1, 2020 or later.
Elimination of Some “Stretch” IRA Provisions
Prior to the SECURE Act, the required distribution rules permitted certain inherited IRA beneficiaries to withdraw the required distributions over their lifetime; also known as “stretching” the IRA. The Act significantly changes and complicates the required distribution rules, especially for non-spouse IRA beneficiaries.
The Act created three categories of IRA beneficiaries for required distribution purposes: eligible beneficiaries, designated beneficiaries, and non-designated beneficiaries. “Eligible” beneficiaries is the largest group and include spouses, minor children, disabled persons, the chronically ill, certain trusts, and those who are not more than 10 years younger than the account owner. “Designated” beneficiaries include non-spouses and certain trusts, and “non-designated” beneficiaries include charities, estates, and certain trusts.
As long as an individual is considered an “eligible” beneficiary under the Act, the “stretch” IRA rules will apply, allowing the beneficiary to spread the IRA distributions over their life-expectancy. However, when one becomes a “designated” beneficiary under the Act, the inherited retirement account must be fully distributed by year 10 following the qualifying event. Lastly, “non-designated” beneficiaries continue to have five years to fully distribute the inherited account.
The 10-year rule is the most significant change for certain non-spouse beneficiaries as it greatly decreases the long-term value of certain retirement assets, especially from a legacy perspective. As such, to ensure the most favorable outcome for your heirs, now would be a great time to review your retirement account beneficiaries. Furthermore, if your primary beneficiary is a trust, we recommend affirming the appropriateness of this structure with your estate attorney.
Contributing to an IRA Past Age 70 ½
The Act removed the 70 ½ age-limit restriction that previously applied to traditional IRA contributions. This change is effective for contributions made for the 2020 tax year and beyond. Since the age restriction has been removed, the primary requirement for contributing to an IRA is to have earned income. The deductibility of such a contribution still depends on pre-SECURE Act tax rules.
Qualified Charitable Distributions
For QCDs, the age requirements and contribution limits have not changed; an IRA account owner, age 70 ½ or older, can continue to distribute up to $100,000 from their IRA to a qualified charity annually and receive the accompanying tax benefits. However, those who wish to contribute to their IRAs after age 70 ½ and make a QCD should consult their tax advisor and must be aware of the new “anti-abuse” rules. Please note that if you do not intend to contribute to an IRA post age 70 ½, the new anti-abuse rules should not impact you.
Expansion of 529 Saving Plans
Under the Act, qualified education expenses now include the costs of apprenticeship programs that are certified by the Department of Labor. In addition, the Act allows penalty-free withdrawals of up to $10,000 from 529 plans for repayment of certain student loans.
Other Notable Provisions
The Act allows penalty-free withdrawals of up to $5,000 from a retirement account for the birth or adoption of a child. This distribution can also be repaid.
The Kiddie-Tax rules revert to the pre-Tax Cuts and Jobs Act rules; unearned income for minors under the age of 18 can be taxed at their parents’ rate instead of the rate applied to certain trusts and estates. This change is mandatory for 2020 but is optional for 2018 and 2019.
The Act lowered the barriers to entry for insurance companies to provide annuity products to retirement plan participants. Please contact us before choosing an annuity option.
These are just some of the changes created by the SECURE Act that my affect you. If you have any specific questions regarding your unique situation, please do not hesitate to call.
All the best,