The SECURE Act Becomes Law in 2020
The Setting Every Community Up for Retirement Enhancement Act (aka SECURE Act) was passed by Congress and will become law January 1, 2020. There is a lot to unpack beneath the surface, so let me give you a high-level summary. As I review each of the provisions in detail, I’ll let you know where different planning ideas may help your specific situation.
To summarize, the SECURE Act:
1. Eliminates the age limit for making traditional IRA contributions. Under the old law, one couldn’t make contributions past age 70 ½. That restriction is now gone so long as you have earned income.
2. Increases the required minimum distributions (RMD) age to 72 so money can grow tax deferred longer. Under the old law, it was 70 ½. All persons who turn 70 ½ before 12/31/19, must take RMDs under the old rules.
3. Allows penalty-free withdrawals for birth or adoption; allows taxable non-tuition fellowship and stipend payments to be treated as compensation to qualify for an IRA (or Roth IRA) contribution.
4. Provides employer liability protection for annuities in 401k plans. Not sure I like this provision because it may leave employees vulnerable to subpar selection. Annuities can be useful planning tools, but lifetime income products outside of 401k type plans will generally have more customized options to best fit individual needs.
5. Eliminates the “stretch IRA.” Under old law, IRAs passed onto beneficiaries could be “stretched” over that beneficiary’s lifetime, thereby deferring taxation over more than one lifetime. Under the new law, beneficiaries of IRAs (Roth, non-deductible, and traditional), as well as qualified plan beneficiaries are all subject to a 10-year rule. This rule requires all funds to be distributed by December 31 of the year that contains the 10th anniversary of the date of death. For deaths prior to 2020, the old RMD rules will be grandfathered.
However, there are 5 exemptions under the new law that retain some or all of the old law benefits: spousal rollover, disabled persons, chronically ill, minors to age 18 (or age 26 if still in school), or to a beneficiary not more than 10 years younger than the owner.
The Impact of the Lost “Stretch”
Accounts with less than $1 million likely won’t be impacted much by the rules since most will be consumed during the owner’s lifetime and any remaining funds would be spread over 10 years to the beneficiaries.
Accounts with more than $1 million will likely need review.
On this latter point, caution must be exercised in deciding which strategies are most effective for your objectives. Owners of large accounts typically seek to balance control, protection, and tax savings. Strategies that had previously addressed these concerns may need to be modified or replaced.
Planning Opportunities Under the SECURE Act
One size doesn’t fit all, and you should carefully weigh planning decisions with your advisory team in the context of your overall objectives. A few key considerations would include: how you prioritize tax, legacy, and charitable intentions; your current and future tax rates; your beneficiaries current and future tax rates; the size of your estate.
1. Re-evaluate beneficiary planning (which gets the best treatment under the new rules)
2. Manage Tax Brackets (make use of low tax years, income exclusions)
3. Roth Conversions (depending a future tax rates and time horizon)
4. Life Insurance (for funds specifically targeted to beneficiaries, can replace the “stretch” and has more flexibility and simplicity than the Roth option).
5. Charitable Remainder Trusts (can replicate the “stretch” and may make sense in the right circumstances)
Jerry Matecun – Founder, President
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PLEASE NOTE: Nothing herein constitutes investment, legal, or tax advice. For details please see Disclosure.