The SECURE Act: How it Could Affect Your Retirement and Estate Plans
This legislative overhaul brought about numerous changes that are likely to impact your finances.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law on December 20, 2019, and it took effect on January 1, 2020. Overall, the legislation is intended to strengthen retirement security nationwide, but it also contains multiple changes that impact retirement and estate planning. Let’s dig into a few of the most significant provisions.
No Age Cut-Off for IRA Contributions
In the past, you were prohibited from contributing to a traditional IRA in the year you reached age 70 ½, even if you were still employed. The SECURE Act eliminates this rule so that anyone, regardless of age, can make IRA contributions as long as they have earned income to contribute. With this change, traditional IRA rules now mirror the contribution rules for Roth IRAs and 401(k) plans.
This longer contribution period takes effect for the 2020 tax year. Although 2019 contributions can be made up until April 15, 2020, these contributions must still follow the past rules, meaning only individuals under the age of 70 ½ can contribute for tax year 2019.
Delayed Required Minimum Distributions
Another important change implemented through the SECURE Act was to ease the required minimum distribution (RMD) rules for traditional IRAs and other qualified plans. However, this facet of the law has been further impacted by the Coronavirus Aid, Relief and Economic Security (CARES) Act, which was signed into law on March 27, 2020.
Prior to the SECURE Act, you were required to begin taking RMDs – and paying taxes on them – at age 70 ½, but this legislation raised the age to 72. It applies to anyone who was not yet 70 ½ as of December 31, 2019. While this RMD change is likely to remain in place in future tax years, the CARES Act has suspended all RMDs for the tax year 2020 as the nation works to recover from the economic downturn caused by the COVID-19 pandemic.
Another note on RMDs: many taxpayers have been using qualified charitable distributions (QCDs) as a way to satisfy the RMD requirement while also contributing to charitable causes that are meaningful to them. A QCD allows you to contribute up to $100,000 per year to a qualified 501(c)(3) organization once you reach age 70 ½, and this remains true even though the SECURE Act raised the RMD age to 72.
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Eliminates ‘Stretch’ RMD
This new provision is especially important for younger beneficiaries of inherited defined contribution accounts. In the past, they could “stretch” their distributions by spreading them over their life expectancies, essentially deferring taxes while the accounts continued to grow. The SECURE Act now requires that most beneficiaries withdraw the full balance of an inherited account within ten years of the owner’s death. However, there is no set schedule in place, so it’s possible to wait until the end of the ten years and withdraw the entire amount at that time.
This new rule only applies to those who inherit a defined contribution account from someone who died after 2019. Anyone who inherited such an account prior to last year will not be required to meet the ten-year rule.
There are also a few exceptions in the SECURE Act for this particular provision. The following individuals may still ‘stretch’ their RMDs:
- Surviving spouses
- Children under 18 (the ten-year rule kicks in when they reach “the age of majority”)
- Chronically ill and disabled individuals
- Those who are no more than ten years younger than the account owner
If you’ve been counting on stretch RMDs in your estate plan – especially if you hope to prevent your beneficiaries from depleting accounts too quickly – you may be able to put protections in place by naming a charitable remainder trust (CRT) as the beneficiary of your account. Then, you would name your children as beneficiaries of the trust’s income. A CRT can provide an income stream for a specified number of years, or until the beneficiaries’ deaths.
SEE ALSO: How to Avoid Retirement Tax Surprises
Another tool to consider in your estate planning is the Roth conversion. When you move money from a pre-tax IRA to an after-tax Roth IRA during retirement, you negate RMDs during your lifetime, plus the Roth can continue to grow tax-free and your beneficiaries won’t pay tax on distributions. Of course, you’ll owe taxes on the amount you convert, so you may want to do it strategically over time, rather than in one fell swoop. It’s best to consult with your financial advisor before starting a Roth conversion.
New Exemption for Births and Adoptions
The SECURE Act implemented a brand-new exemption for qualified births and adoptions, meaning there is no longer a ten percent tax penalty for early withdrawals from defined contribution plans. It is now permissible to withdraw an aggregate of $5,000 within one year of the birth of a child or the adoption of a minor (or an adult who is physically or mentally incapacitated) without penalty. If both parents have their own retirement plans, they may withdraw an aggregate of $10,000 penalty-free. However, it is notable that children your spouse has from prior relationships are not considered eligible adoptees.
More Options for 529 Plans
The SECURE Act also expanded options for using 529 plans. Now, it’s possible to use up to $10,000 to pay principal and interest on a plan beneficiary’s qualified education loans. What’s more, the new law also allows for plan distributions, subject to the same $10,00 limit, to pay student loan bills for the beneficiary’s siblings.
Additionally, 529 plans have now been expanded to cover apprenticeship programs. Distributions can be made to cover the costs of program fees, books, supplies, and equipment required for an apprenticeship program.
Your Next Step
All of the above changes in retirement and estate planning law should prompt you to carefully review your own plans – and it’s likely that recent economic events have you thinking about your long-term plan anyway. You may need to make changes in order to accomplish your goals, including minimizing tax liability.
If you’d like to discuss how the SECURE Act may impact your financial plans, let’s start a conversation today and ensure you can meet your retirement and estate planning objectives amidst changing laws and an uncertain world.