The SECURE Act, and what it might mean for you
At the end of 2019, President Trump signed into law the Setting Every Community Up For Retirement Enhancement (SECURE) Act (A title like that could come in handy for a trivia question someday).
This is the first substantial change in legislation affecting retirement planning in well over a decade. While the document itself is about 125 pages, with 30 different provisions, a lot of those provisions pertain to retirement plans through employers, including allowing smaller employers to pool their 401(k)s to potentially take advantage of better retirement plan options. However, there are a few key provisions that are important for individual investors to understand.
To start off, under the previous rule individuals age 70 ½ and older were required to distribute money out of their IRAs, or qualified retirement plans, as Required Minimum Distributions (RMDs). The SECURE Act has extended the start date to the year in which you turn 72. This change only impacts people that reach age 70 ½ after December 31, 2019. In other words, if you have started to take RMDs in 2019, you are required to continue to take RMDs in 2020. Unrelated to the SECURE Act, but also relevant is that the IRS has updated the factors used to calculate the amount of the RMD, but those do not go into effect until 2021. Interestingly, the Qualified Charitable Distribution tax strategy, which allows you to make a contribution to a qualified charity directly from your IRA and not treat that distribution as income, is still allowed once you reach age 70 ½.
Another way the SECURE Act affects retirement accounts, is by eliminating the rule restricting individuals over age 70 ½ from contributing to their IRAs. Meaning, as long as you (or your spouse) have earned income, you can make contributions to an IRA or Roth IRA indefinitely (within the contribution limitations). This change puts traditional IRAs and Roth IRAs on the same footing. (Note: there is a limitation if you do both an IRA contribution and a QCD in the same year.)
Keeping with the IRA theme, new parents now have the ability to take out up to $5,000 for qualified birth or adoption expenses. While this avoids the 10% penalty that is typical for distributions prior to age 59 ½, the amount is still taxable income to the IRA owner. It should be noted that the benefit is limited to $5,000 for your lifetime, not per year. Interestingly, you are allowed to recontribute the amount withdrawn back into your IRA.
The SECURE Act also made a change to 529 plans. Now, account owners have the ability to take out up to $10,000 per year to pay down, or pay off, student loans.
Finally, and probably one of the most talked about sections of the Act, is the elimination of the stretch-out provision for non-spouse beneficiaries of an IRA. Prior to the SECURE Act, non-spouse beneficiaries could take distributions from an inherited IRA based upon their own life expectancy. Under the SECURE Act, a non-spouse beneficiary of an IRA must distribute the entire inherited account balance over the course of just ten years. This has the potential to result in a sizable tax bill for a beneficiary who may not be prepared for it. This change affects most inherited IRAs starting January 1, 2020 (There are a handful of exceptions to the 10-year rule including surviving spouse, minor children, disabled individuals, etc.). Since previously inherited accounts have already had a distribution formula attached to them, they do not need to adopt the new ten year payout.
It will take some time to sort out exactly how the SECURE Act may affect your personal financial plan. There are both opportunities and new challenges associated with these changes. We are here to assist in answering your questions and making sure that your plan incorporates these changes going forward.
The SECURE Act, and what it might mean for you Blog Post is being provided for informational purposes only. Moreover, no client or prospective client should assume that this content serves as the receipt of, or a substitute for, personalized advice from Affiance Financial, or from any other professional. In addition, this content is not intended to provide specific tax advice. For specific tax advice, the services of an accountant should be sought.