The SECURE Act and Your Retirement

The Setting Every Community Up for Retirement Enhancement (SECURE) Act became law on December 20, 2019. While the majority of the SECURE Act focuses on changes and enhancements to company retirement plans, there are a few provisions that may impact your strategy for managing retirement assets and transferring wealth to your heirs. Below is a summary of the most significant provisions of the Act.

Required Minimum Distribution (RMD) Age: For individuals who reach age 70.5 after December 31, 2019, the age at which distributions from traditional IRAs and qualified retirement plans must begin has increased to 72. However, anyone who had already attained age 70.5 will be required to continue taking RMDs as previously scheduled. The first year, RMD can be delayed until April 1st of the following year, as it could under prior law. However, a second RMD will also still need to be distributed by December 31 that year and every December 31 thereafter.

• Planning Opportunity: If you have not yet reached age 70.5, talk with your advisor about the potential for delaying IRA distributions until age 72. Depending on your assets and income needs, it may or may not be advantageous to wait. The age extension also provides the potential opportunity to strategically withdraw IRA assets or pursue Roth IRA Conversions with the intention of filling lower income tax brackets before reaching RMD age.

Elimination of the Stretch IRA for Non-Spouse Beneficiaries: Under prior law, a non-spouse IRA beneficiary could keep this asset in an Inherited IRA. The beneficiary was generally required to take distributions based on his/her own life expectancy, but as long as those distributions occurred annually, the asset could remain tax-deferred for the entire life of the beneficiary.

The SECURE Act has removed this so-called “stretch” provision for beneficiaries of IRAs and qualified retirement plans. A non-spouse beneficiary, who is more than ten years younger than the account owner, is now required to deplete the account within ten years of the death of the account owner. For a beneficiary who is a minor, the child must still take RMDs based on his/her life expectancy until they reach the age of majority and then the ten year rule would apply. Finally, listing a Trust as an IRA or qualified plan beneficiary will also result in the IRA being depleted in 10 years. This applies to IRA and qualified plan account owners who die after December 31, 2019.

• Planning Opportunity: Review your beneficiary designations on your IRA and qualified plan accounts. If one of your goals is to transfer wealth to your children or grandchildren, an IRA may no longer be the most tax-effective way to achieve that. Statistically, adult children usually inherit IRA assets in their 50’s or 60’s, which is generally the adult child’s highest-earning years. Leaving the adult child a large IRA that must be distributed, and taxed, over a maximum of 10 years, may result in almost half of the IRA going to federal and state income tax. Systematically distributing assets from an IRA prior to death would allow you to leave your heirs an asset that receives a step-up in basis and is not required to be depleted over a specific timeframe.

IRA Contributions Beyond Age 70.5: Individuals who continue to have earned income past age 70.5 now have the potential to make tax-deductible IRA contributions. Under prior law, IRA contributions were not permitted past age 70.5. For 2020, the IRA contribution limit is $6,000 plus a $1,000 catch up for those over age 50. As before, there are no age-based restrictions on contributions to a Roth IRA.

• Planning Opportunity: If you have earned income, talk with your advisor about the possibility of making IRA contributions. NOTE: IRA contributions made after age 70.5 will reduce your ability to make large Qualified Charitable Distributions (QCD). If you currently make or plan to make QCD’s please talk with your tax advisor prior to making an IRA contribution.

Retirement Plan Deferrals for Part-Time Workers: Most qualified retirement plans have a minimum hour requirement (generally 1,000 hours) for a worker to be eligible to make deferral contributions. For plan years beginning after December 31, 2020, any employee who has worked at least 500 hours per year for at least three consecutive years for that employer, and who is over age 21, will be eligible to make deferral contributions to the plan. Separate requirements may apply to employer matching, profit sharing or non-elective contributions.

• Planning Opportunity: If you work part-time and were previously ineligible for participation in your employer’s qualified retirement plan, talk with your human resources representative to see if this new legislation provides you with an opportunity to make deferral contributions.

529 Plan Distributions: The definition of a “qualified distribution” has been expanded to include costs associated with registered apprenticeships. Another important change is the ability to take a qualified distribution of up to $10,000 for the repayment of student loans (principal and interest). The $10,000 amount is a lifetime limit that applies to the 529 plan beneficiary and each of their siblings. Keep in mind the portion of the student loan interest that is paid for with the 529 plan will not be eligible for the student loan interest deduction.

• Planning Opportunity: If you have a 529 Plan for a beneficiary who has student loan debt, or has a sibling with student loan debt, you might consider qualified distributions for debt repayment. NOTE: The SECURE Act is a federal law and addresses the definition of a qualified distribution from a federal income tax standpoint. Each state will need to decide how to address this from a state income tax standpoint. Before you make a decision to withdraw 529 Plan funds for loan repayment, talk with your tax advisor.

Kiddie Tax Amendment: In 2017, the Tax Cuts and Jobs Act (TCJA) changed the income tax rates applied to earned and unearned income of children under age 19 (or age 24 if a full-time student). Under TCJA, unearned income (including investment income/interest/dividends) was taxed under the same rates as trusts and estates, which meant an income of $12,500 or more was taxed at the highest income tax rate of 37% federally. The SECURE Act has repealed this provision of the TCJA. Unearned income for a child is now taxed at the parent’s marginal tax rate (as it was prior to TCJA). The Act also allows taxpayers to elect to apply the change retroactively to 2018 and 2019.

• Planning Opportunity: If you have a child who had unearned income in 2018 or 2019, talk with your advisor to determine the potential tax savings that may be attained if you elect to have the change applied retroactively. Furthermore, consider revisiting the allocation of the investments within the account to ensure tax efficiency.

As with all legislation, the provisions are complex and may contain caveats that could change the impact on you and your specific situation. We recommend talking with your advisor and reviewing your financial plan before making any decisions. The Aldrich Wealth team has the expertise to address these issues and provide you with customized recommendations.