How Does the SECURE ACT Impact Your Retirement Planning?
The SECURE ACT is legislation that makes some important changes to retirement planning for both individuals and businesses. The SECURE ACT was thought to be dead in the water as late as November/early December 2019. At the very end of December, it got attached to the legislation that would fund the Federal govt. The funding legislation was passed and signed by the President.
Here are some of the important changes that impact individual retirement savers and their beneficiaries:
New Required Beginning Date for RMDs at 72
In the past, the mandatory beginning date for most retired individuals was age 70.5 to begin taking RMDs from their retirement accounts.
NOTE: If you have not yet reached age 70.5 by the end of 2019, your new required beginning date for RMDs will be age 72. If you were born ON/AFTER July 1 1949, you are under the new age 72 RMD rules!!
NOTE: However, if you reach age 70.5 by the end of 2019, your required beginning date is set, and the SECURE Act does not change the requirement for you to begin taking out RMDs at 70.5. If you were born ON/PRIOR June 30, 1949, you are under the old 70 ½ rules!!
Removal of Age 70.5 IRA Contribution Restriction
Under previous law, those working past age 70.5 could not contribute to a traditional IRA. Starting in 2020, the SECURE Act will remove that restriction.
This means that those working past age 70.5 can contribute to an IRA — either deductible or non-deductible — depending on other factors around IRA contributions like income, filing status, earned compensation, and active status in a qualified plan. As such, someone after age 70.5 could now contribute up to $7,000 as a deductible contribution to an IRA and so could a spouse, totaling $14,000 as a couple per year, if they meet certain requirements.
Our thoughts on this: If you are over 70 ½ and still working, you will have an opportunity to contribute a larger amount to your company’s 401k. The ability to contribute to an IRA with earned income post 70 ½ is nice, but not everything that the media is making it out to be.
Removal of Inherited “Stretch” Provisions
In the past, a non-spouse beneficiary of an IRA or a 401(k) type plan could stretch out RMDs from the plan over the beneficiary’s life expectancy.
Starting on Jan. 1, 2020, if an owner of IRAs and 401(k)s passes away and leaves the accounts to a beneficiary other than their spouse, the beneficiary will only have 10 years after the year of death to distribute the entire retirement account unless the beneficiary is a qualified eligible beneficiary as defined in the SECURE Act. Forcing the funds to be distributed fasted means more tax revenue for the government.
Exempted from the 10-year stretch provisions are surviving spouses, minor children up until the age of majority, individuals within 10 years of age of the deceased, the chronically ill and the disabled.
NOTE: Non-Spouse Beneficiaries who had inherited an IRA prior to January 1, 2020 will continue to operate under the old rules.
Our thoughts on this: The media is really playing up this section of the Act as a major negative. There are a number of realities here that the media is ignoring:
- The largest percentage of beneficiaries who inherit money spend it within 2 years or so.
- This will only impact those beneficiaries who inherit IRAs with large balances or who are disciplined enough not to spend the money as soon as it gets into their hands.
- Forcing the beneficiaries to remove the funds (and pay the taxes) from the IRA within 10 years does not mean the beneficiaries have to spend that money. They could easily set up a transfer to a non-IRA investment account.
- A planning thought for the IRA owner might be to convert portions of the IRA to Roth IRA over a period of years. However, and this is a BIG, however, this means the IRA owner pays the taxes on the conversion amount. If the IRA owner is not careful, the IRA conversion could increase income to the point that the IRA owner ends up paying higher Medicare premiums!
- If you consider the converting all or portions of your IRA to a Roth, it is imperative that you speak with your tax professional!
What should IRA owners do (particularly those who are older or who have larger balances)?
- Review Your Beneficiaries Because the SECURE Act changes the outcome for many inherited retirement accounts to be distributed in a shorter time period, now is the time to review your beneficiary designations. Beneficiary designations on IRAs and 401(k)s determines who the accounts will pass to once the owner dies. Take the time and make sure all your beneficiary designations are in order and that they still match up with your intended goals.
- Take a Close Look at Your Trust If you were using a trust as a beneficiary of an IRA or 401(k) in order to achieve creditor protections and take advantage of the stretch provisions through a “pass-through” trust, there could be a huge issue with your plan now that the SECURE Act passed. Most of these conduit or pass-through stretch trusts for IRAs were set up to pass through RMDs to the beneficiary.
However, if the trust language states that the beneficiary only has access to the RMD each year, under the new rules, there is no RMD until year 10 after the year of death. This means the IRA money could be held up in the trust for 10 years and then all be distributed as a taxable event on year 10.