If you’ve kept your eyes or ears on the news, it’s likely that you’ve heard the SECURE Act referenced in some form. The SECURE Act is a piece of legislation that was passed in December of 2019. SECURE is an acronym that stands for ‘Setting Every Community Up for Retirement Enhancement’. There are many changes and implications that come along with it, some of which will have significant impacts on retirement savings and estate planning for many Americans.
We are here for you in your journey of building your future. Review some of the new law’s key components below. In addition, the team at our office is ready to help you understand or explain any details in any way that you need. We’re also happy to provide our established clients with more detail and recommend adjustments to your retirement, investment, or estate plans if warranted.
1. Removal of ‘Stretch’ Inherited IRA Provisions
In the past, non-spousal beneficiaries of retirement accounts such as 401(k)s and IRAs could typically spread – or “stretch” – distributions over their life expectancy. The new stipulations now require that most beneficiaries take distributions from the inherited retirement account over ten years, rather than over their life expectancy.
The new rule impacts beneficiaries of account owners that pass in 2020 or later. Beneficiaries of account owners who passed away in 2019 and earlier are grandfathered under the old rules. If grandfathered in, beneficiaries may continue to stretch distributions over their life expectancy.
Other exceptions to the new law include:
- Spousal beneficiaries
- Beneficiaries who are chronically ill or disabled
- Beneficiaries not more than ten years younger than the original account owner
Minor child beneficiaries of the decedent may use the stretch until they reach the age of majority and will then follow the 10-year rule.
If you have named a trust (known as a “pass-through trust” or “conduit trust”) as a beneficiary of your retirement accounts, speak with your estate attorney to review the new law’s details. These trusts often have language that allows trust beneficiaries to receive only required minimum distributions (RMDs). Since there are now no RMDs until the 10th year, the trust’s current language may only permit one distribution in the final year, potentially creating a substantial tax liability.
2. Increased Required Minimum Distribution Ages
A Required Minimum Distribution (RMD) is the minimum distribution a person must take out of their account to avoid tax consequences. Previously, most individuals were required to take RMDs from their traditional IRA, and 401(k) accounts starting in the year they turn 70½. The new law delays this required beginning date to age 72.
Individuals who turn 70½ in 2020 and beyond (born on or after July 1, 1949) may delay taking RMDs until age 72 and may still wait until April 1 in the year after turning 72 to take their first distribution. If you became 70½ in 2019, you’re required to satisfy your RMD for that year and will have to continue taking RMDs each year.
3. Removal of Age Limitation on IRA Contributions
Previously, you couldn’t contribute to a traditional IRA after age 70½. The new law has removed that age limit. This is particularly significant for those who continue to work later in life, and it aligns with contribution rules currently in place for 401(k)s and Roth IRAs.
4. Penalty-Free Distributions For Birth of Child or Adoption
Now, $5,000 per parent may be distributed from a retirement plan without the 10% penalty in the event of a qualified birth or adoption. The distribution would need to occur within one year of the child’s birth or the adoption’s finalization.
5. Reversal of Previous ‘Kiddie Taxation’ Implications
The 2017 tax law changed how unearned income for some children was taxed, using the rates for estates and trusts rather than the parent’s marginal rate. Now, this change has been reversed. Unearned income for some children in 2020 and beyond will once again be taxed at the parent’s marginal rate. Furthermore, parents have the option of applying the new kiddie tax rules for 2018 and 2019.
6. Increase in Qualified Expenses for 529 Plans
The list of qualified expenses for 529 plan distributions has been expanded – notably, distributions for apprenticeship programs and “qualified education loan repayments” are now allowed. Up to $10,000 may be distributed to pay both principal and interest for qualified education loans for the plan beneficiary, and an additional $10,000 may be used to repay loans for each of the plan beneficiary’s siblings.