One of the most comprehensive changes to our retirement laws in decades was made on December 20th, 2019, with the passage of the “Setting Every Community Up for Retirement Enhancement” Act or the SECURE Act. This legislation puts into place new provisions intended to strengthen retirement success across the country and will inevitably affect many retirement savers. Here are a few of the most significant provisions that you should be aware of:
Elimination of the “Stretch IRA”
Before the passage of the SECURE Act a non-spouse beneficiary of an IRA could “stretch” required annual distributions over his or her lifetime. This was particularly beneficial for younger beneficiaries as the payout period might stretch over decades – thus allowing the payment of income taxes on these distributions to last a long period of time. The SECURE Act eliminates Stretch IRAs as an estate planning tool.
Effective for IRAs inherited after December 31st, 2019, funds must now be fully withdrawn within 10 years, beginning the year after the account owner’s death. There are no longer any annual required minimum distributions – you simply must empty the account by the tenth year. This allows a beneficiary to employ some tax planning when determining which years a distribution could potentially push them into a higher income tax bracket. If you are already taking required minimum distributions from an inherited IRA, this change does not affect you.
The Act allows an exemption for certain beneficiaries including surviving spouses, minor children, the chronically ill and disabled, and beneficiaries who are not more than 10 years younger than the account owner. Grandchildren are not included among these exemptions.
This is an excellent time to review the beneficiaries on all of your retirement accounts.
Raising the Age for Required Minimum Distributions
When you contribute money tax-free to a traditional IRA, the Federal government mandates that taxable distributions must begin when a certain age is reached. The SECURE Act pushes that age from 70½ to age 72 for everyone born on or after January 1st, 1950. This will allow individuals to keep funds in their IRA accounts for longer. Additionally, it may allow for more years of low-income individuals to consider Roth conversions for their IRA accounts.
It is important to note that even though the age to start taking required minimum distributions has increased, the age to start making qualified charitable distributions (QCDs) remains 70½. If you are age 70½ or older, you are permitted to donate up to $100,000 in tax-free distributions to qualified charities beginning the day you turn 70½. Remember that if you make a QCD even one day before you turn 70½, it will be treated as a taxable event. Please reach out to your Main Street planning team to review QCD requirements and eligibility.
IRA Contributions Beyond Age 70½
As we continue to live longer, an increasing number of individuals now work past their full retirement age. Under the SECURE Act an individual can continue to contribute to their traditional IRA past the age of 70½ as long as they have earned income. This will align the rules for traditional IRA accounts more closely with 401(k) plans and Roth IRAs.
There are many other provisions in the SECURE Act and we have highlighted a few other key changes below. The SECURE Act will:
- Make it easier for small business owners to set up “safe harbor” retirement plans that are less expensive and easier to administer.
- Enable part-time employees who work either 1,000 hours throughout the year or have three consecutive years with 500 hours of service to join their employer’s retirement plans.
- Encourage plan sponsors to include annuities as an investment option in workplace plans by reducing their liability if the insurer cannot meet its financial obligations.
- Expand provisions for 529 college savings plans to be used for student loan repayments (up to $10,000) and Apprenticeship Program costs.
- Permit penalty-free withdrawals of $5,000 from IRAs/Qualified Retirement Plans towards the costs of having or adopting a child.
- Reverse the Kiddie Tax change implemented by the Tax Cuts and Jobs Act, no longer using trust tax rates and instead reverting back to the parents’ top marginal tax bracket.
- Adjust the medical expense deduction threshold (back to 7.5% of AGI again for 2019 and 2020).
- Apply a series of tax extenders for the mortgage insurance premium deduction and the higher education tuition and fees deduction.
We welcome any questions you may have about this new legislation and how it might affect your personal situation. Anyone on the planning team, Tamra, Natalie or Melissa, would be happy to review your beneficiaries with you on your retirement accounts.
If you have any friends or colleagues who you feel may benefit from our services, we would be happy to introduce ourselves to them with a no-obligation introductory meeting.