The SECURE Act Changes Retirement Planning
SBK Planning Series:
By Nicole Boike, CPA, CFP
On December 20th, President Trump signed into law the Setting Every Community Up for Retirement (SECURE) Act as part of the government’s year-end spending bill. Effective for 2020, the bill significantly changes the rules and administration of retirement accounts and provides new incentives to encourage more plan contributions. Whether you are in the midst of your career or are reveling in the culmination of one, this bill includes changes that will impact your retirement. Below are some of its key provisions.
RETIREMENT ACCOUNT DISTRIBUTIONS – (RETIREES)
New Required Minimum Distribution (RMD) age. The age at which individuals must begin taking RMDs has been increased from 70 ½ to 72, allowing funds to continue growing tax-deferred a little longer.
- Note of caution: This change applies only to people who turn 70 ½ after December 31, 2019. If you turned 70 ½ in 2019, your RMD for 2019 must still be completed no later than April 1, 2020 and you will still be required to take an RMD for 2020.
- Note on Qualified Charitable Distributions (QCDs): The age limit for making QCDs remains 70 ½.
New RMD tables. Starting in 2021, RMDs will be calculated using new life expectancy tables. RMDs for 2020, will be computed using the old, existing rules. The new tables adjust for an increase in average life expectancy, allowing for potentially even more deferral for some retirees and beneficiaries.
RETIREMENT PLAN FUNDING – (PRE-RETIREES)
Additional years to save in Individual Retirement Accounts (IRAs). The prohibition on contributing to traditional IRAs after age 70 ½ has been lifted beginning in 2020. This allows those who are still working (or have a spouse who is still working) to continue contributing to IRAs without age limit.
- Note on QCDs: Any post-70 ½ IRA contributions that are made and deducted on your tax return will reduce the amount of your deductible QCDs in subsequent years.
Incentives for small businesses to establish retirement plans for employees. The Act contains various measures to increase the affordability of 401(k) and other retirement plans, including:
- Increasing business tax credits for plan startup costs and adoption of automatic enrollment;
- Simplifying rules related to qualified non-elective contributions in safe harbor 401(k) plans; and
- Allowing small employers to pool together in multiple-employer retirement plans (MEPs) to provide economies of scale and thereby reduce costs and administrative duties.
Participation of long-term, part-time employees in 401(k) plans. Newly eligible employees include those who complete at least 500 hours of service each year for three consecutive years (starting in 2021).
Qualified withdrawals for birth or adoption. Up to $5,000 can be distributed from a retirement account to pay for birth or legal adoption expenses without penalty (withdrawals are still subject to tax).
Annuity options in 401(k) and other defined contribution plans. The new law lowers barriers for offering annuities in employer-sponsored plans. Currently, many ERISA fiduciaries have avoided offering lifetime income annuities as investment options because of liability concerns. The SECURE Act alleviates some of this pressure by providing safe harbor criteria for purposes of liability protection. Investment selections within your employer-sponsored plans should be carefully considered.
INHERITED RETIREMENT ACCOUNTS
Mandatory distribution within 10 years for most non-spouse beneficiaries. Perhaps the most sweeping change from the bill is the provision that IRAs inherited after December 31, 2019* must be fully distributed by the end of the 10th year following the original account owner’s death (*December 31, 2021 for certain government plans). There is no annual RMD requirement during this window. This new rule only applies to accounts inherited in 2020 and beyond – it does not affect existing inherited accounts.
Beneficiaries who are exempt from this rule and may stretch RMDs over their life expectancy include:
- Surviving spouses (spousal rollovers still allowed)
- Minor children (until they reach the age of majority, after which the 10-year rule will kick in)
- Disabled or chronically ill beneficiaries
- Beneficiaries not more than 10 years younger than the original account owner
Planning note: The elimination of the stretch provision for most non-spouse beneficiaries has significant estate planning implications. In light of this new rule, you should review your current account beneficiaries (primary and contingent). If you inherit an IRA after 2019, consider contacting an advisor to discuss the most tax-efficient liquidation plan in light of this new 10-year rule.
EXTENDED TAX BREAKS, OTHER NON-RETIREMENT CHANGES, & CONCLUSIONS
Tax extenders. The year-end bill also extends several tax cuts that previously expired or were set to expire, including: 1) tuition and fees deduction, 2) mortgage insurance premiums deduction and 3) energy efficient home credit. Additionally, the medical expense AGI limitation threshold will be reduced from 10% to 7.5%. These benefits are effective for tax years 2019 and 2020 (and are also retroactive to 2018).
Student loan repayments from 529 plans. Funds from college savings plans can now be used to repay student loan debt, subject to a $10,000 per-person lifetime limit (effective retroactively to Jan. 1st, 2019).
Kiddie tax reverts to pre-TCJCA rules. Investment income of children will again be taxed at their parents’ marginal tax rate rather than trust tax rates (election available for tax year 2019 (and 2018)).
In closing. The SECURE Act introduces additional layers of complexity in planning for retirement. As you familiarize yourself with this bill, please don’t hesitate to reach out to us. To learn more about how we feature tax planning in our client service model, please visit our website at www.sbkfinancial.com.
SBK is a wealth advisory partner offering holistic, independent and objective wealth management services. Our customized and comprehensive approach enables us to generate tailored solutions for you and your family – every step of the way.