The SECURE Act for Individual Investors
The Setting Every Community Up for Retirement Enhancement Act, better known as the SECURE Act, was signed into law on Friday, December 20th, 2019. This is the first major piece of retirement legislation in over a decade. It has been characterized as “monumental and sweeping” given the rule changes associated with Traditional IRAs.
Here are the major changes that will be affecting individual investors:
RMDs Will Start at Age 72, Not 70½ – Starting on January 1, 2020
The new law pushes the age at which you need to start withdrawing money from your Traditional IRA to age 72, from age 70½. If you turned 70½ in 2019, you will still need to take your RMD for 2019, no later than April 1, 2020. If you are currently receiving RMDs because you are over age 70½, you must continue to take your RMD. Only those who turn 70½ in 2020 (or later), may wait until age 72 to being taking required distributions.
You Can Contribute to Your Traditional IRA after Age 70½
Beginning in the 2020 tax year, the law will allow you to contribute to your Traditional IRA in the year you turn 70½ and beyond, provided you have earned income.
Inherited Retirement Accounts
The new legislation eliminates the so-called “stretch” provision, starting on January 1, 2020. Upon the death of the account owner, distributions to individual beneficiaries must be made within 10 years. If you are already taking required minimum distributions (RMDs) from an inherited IRA, you will not be affected. There are exceptions for spouses, disabled individuals, and individuals not more than 10 years younger than account owner. Minor children who are beneficiaries of IRA accounts also have a special exception to the 10 year rule, but only until they reach the age of majority.
Another new option for parents seen in the new law allows penalty-free withdrawals from retirement plans for birth or adoption expenses up to certain limits ($5,000). Such withdrawals would still be subject to income taxation, only the 10% penalty is waived.
Expanded Provisions for 529 College Savings Plans
The definition of qualified higher education expenses is expanded to include student loan payments and the costs of apprenticeship programs. Withdrawals of as much as $10,000 from 529 education-savings plans can be used for the repayment of student loans.
As with all major Federal legislation there are gives and takes. The give was the extension of the RMD start date by 18-months to age 72. The take was significant, the elimination of the stretch provision for inherited IRAs. This means that inherited IRAs will be taxed sooner and at potentially higher rates than before. As a result, individuals need to reevaluate the legacy objectives associated with their traditional IRA assets. Some of the considerations in planning may include: Roth conversions, Qualified Charitable Donations (QCDs), Charitable Remainder Trusts (CRTs) and bequeathing other assets.
Roth Conversion – convert traditional IRA funds into a Roth IRA. You would pay the taxes now, but your beneficiaries’ withdrawals would be tax-free under current law. This strategy also benefits if marginal tax rates increase in the future. It would be best to do a series of smaller conversions over a number of years to spread out your tax burden.
Qualified Charitable Donations (QCD) – make a donation directly from your IRA to a qualified charity. The donated amount is excluded from taxable income, possibly resulting in a lower tax bill. This is the best money to give to charity, as it has never been taxed, and will not be taxed in the future.
Charitable Remainder Trust – an IRA can be left to a Charitable Remainder Trust (CRT). This would act as a stretch IRA, even under the new rules. A non-charitable beneficiary, such as a child, would receive annual payments from the CRT over his or her lifetime (or a pre-determined period of years), with income tax assessed as the payments are made. Whatever remains in the account upon the child’s death (or the expiration of the term of years) would pass to one or more charities of the your choosing tax-free.
Bequest Other Assets – instead of passing on the IRA, deplete those savings and bequeath assets from your taxable accounts. Taxable accounts will receive a step-up in basis at the time of death. Because the beneficiary is free to sell inherited stocks whenever they wish, they can time their sales to mitigate a steep tax bill, rather than being forced to make withdrawals during a 10-year window.