In December 2019, Congress passed a funding bill dubbed the SECURE Act – Setting Every Community Up for Retirement Enhancement – which includes certain provisions that will significantly change the way retirement benefits are distributed and taxed for most beneficiaries other than surviving spouses.
For years Congress has had its eyes on the trillions of dollars in the U.S. retirement market as a potential source of revenue. At last, they have passed legislation to accelerate the taxation of retirement accounts once the ownership of those accounts passes to non-spousal beneficiaries. Retirement assets in the United States stood at $28 trillion in the first quarter of 2018, of which Individual Retirement Accounts represent a little over $9 trillion.
This high-level overview addresses the issues that may be of importance to our readers, many of whom will need to consult with REDW and with their estate planning counsel to determine the best way to deal with the new changes in the law.
Outlined below are the principal changes arising from the new law that may affect your financial and retirement planning.
Major Changes and What They May Mean for You
- Beneficiaries of an IRA, other than the surviving spouse, can no longer “stretch†the benefits over their lifetimes. Benefits must be paid out over 10 years (and possibly 11).
- Spousal beneficiaries are unaffected.
- There are exceptions to the new “no stretch†provisions of the law that include children, disabled or chronically ill individuals, and beneficiaries who are not more than 10 years younger than the person from whom the IRA was inherited.
- Required distributions from retirement plans will be calculated from the year the owner turns 72, rather than 70½. This will allow for an additional year-and-a-half of accumulations before income must start to be taken from the retirement account.
- Individuals who continue to work after age 70½ may still contribute to an IRA account and a Spousal IRA if possible.
- Retirement plan distributions that must begin by age 72 (or April 1 of the year following, which would then require two distributions in that year) will have a new modified schedule that will lower the required amounts.
- Although the required distribution start age is 72, the ability to make Qualified Charitable Distributions from an IRA to a charity remains unchanged at age 70½.
- Onerous income tax provisions have been in place for the past several years that created very high taxes on retirement income inherited by a child or a grandchild. Those rules have been repealed.
- Some of our clients have named trusts as primary or contingent beneficiaries of their retirement accounts. Technical changes in the law may require revisions to trust documents.
- Section 529 Plans for education may now be used to repay up to $10,000 in student loans for an account beneficiary, as well as his or her siblings. Additionally, the 529 plan can now be used to cover registered apprenticeships and private, elementary, secondary or religious schools.
- The medical expense deduction limit has been reduced for 2019 and 2020. Deductions will be available when expenses exceed 7.5% of Adjusted Gross Income.
- The new law allows for account owners to access their IRA funds early and without penalty for a “qualified birth or adoption.†The money is still subject to tax and is limited to a $5,000 lifetime benefit.
- 401(k) plans will be allowed to add income guarantees that will be offered by insurance companies through the sale of annuities. Those income guarantees will be able to be added to the account prior to retirement.
How Can We Help?
- The loss of the “stretch†provisions will probably resonate through some of the popular press as a falling sky event. We don’t see it that way and have already begun working on strategic planning that can reduce or eliminate some or all of the tax burden of an inherited IRA.
- Since beneficiary designations will need to be reviewed in order to coordinate with all aspects of a client’s estate plan, we think this represents a great planning opportunity to make sure all aspects of our clients’ planning are in order.
- ROTH IRA accounts maintain their tax-free status under the law. Therefore, ROTH conversions may become an important part of retirement income planning, moving forward.
- Some financial and estate planning assumptions may need to be reconsidered for disabled individuals, both those that rely on special needs trusts and those who are eligible for Social Security disability, but who are not dependent on Medicaid. We can coordinate the income tax planning with your legal advisors to create plans to meet this new reality.
- Since grandchildren are now exempt from the penalty taxes that existed for retirement plan assets, we may be able to help design estate and income plans that will be most efficient for a family’s total income tax situation.
- Younger clients with minor children need to be especially careful with their total estate plan design, since retirement plan assets will have to be spent on a different schedule from other inherited assets. Estate planning for younger retirement plan account owners has just become much more important.
If you would like any additional information about how the SECURE Act may impact your overall financial, estate or retirement planning, please contact your REDW Wealth LLC advisor.
Copyright 2020 REDW Wealth LLC. All Rights Reserved. This publication is intended for general informational purposes only and should not be construed as investment, financial, tax, or legal advice.
