Review key changes that may affect your retirement and estate planning.
Passed in December, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 has wide-reaching impacts on retirement savings and estate planning for many Americans.
Review some of the new law’s key components below. Your advisor can help provide more detail and recommend adjustments to your retirement and estate plans, if warranted.
1. It removed the provisions for inherited “stretch” IRAs.
Previously, 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 law now requires most beneficiaries to take distributions from the inherited retirement account over a 10-year period, rather than over their life expectancy.
The new rule affects beneficiaries of account owners that pass in 2020 and beyond. Beneficiaries of account owners who passed away in 2019 and earlier are grandfathered under the old rules and may continue to stretch distributions over their life expectancy. Other exceptions to the new rule include spousal beneficiaries, beneficiaries who are chronically ill or disabled, and beneficiaries not more than 10 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 now there are 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. It increased the age at which RMDs must be taken.
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 turned 70½ in 2019, you’re required to satisfy your RMD for that year and will have to continue taking RMDs each year.
3. It removed the age limitation for contributing to an IRA.
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. It added penalty-free distributions for the birth or adoption of a child.
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. It changed the “kiddie tax” provisions.
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, and 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. It added to the list of 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.
The content provided herein is based on Raymond James’ interpretation of the SECURE Act and is not intended to be legal advice or provide a tax opinion. This document is a summary only and not meant to represent all provisions within the SECURE Act.