The Setting Every Community Up for Retirement Enhancement Act, better known as the SECURE Act, was signed into law on Friday, December 20. Whoever was responsible for the tough task of coming up with words to fit this long, suitable acronym did a pretty decent job.
The Secure Act touches upon a few retirement areas, but the most important changes involve Individual Retirement Accounts (IRA's). If you have an IRA and you're under 70½, you will be subject to the new IRA Required Minimum Distribution rules. If you're over 70½ and have begun receiving RMD's, the new law will not impact your minimum distributions. However, regardless of your age, if you have listed one or more non-spouses as beneficiaries of your IRA, the law has changed regarding the distribution period for those beneficiaries.
Here is a summary of the changes:
Required Minimum Distributions (RMDs) Will Start at Age 72, not 70½
Starting January 1, 2020, individuals will need to begin withdrawing funds from their traditional IRA at age 72, a change from the older withdrawal requirement of age 70½. However, anybody turning 72 in 2020 would have already passed 70½, and are already taking distributions (unless exempt). Therefore it will start to impact individuals who turn 72 in the second half of 2021 and later.
Example: Ken, turns 70½ in December of 2019. The old rules will apply to Ken since his required beginning date (70½) falls in 2019. Therefore, Ken will need to take his 2019 RMD no later than April 1, 2020.
Example: Christina, turns 70½ in January of 2020. The new rules will apply to Christina since her required beginning date (age 72) falls after January 1, 2020. Therefore, Christina's required beginning date is in July of 2021 (72 years-old). She will need to take her 2021 RMD no later than April 1, 2022. Compared to Ken's situation, Christina receives an additional twenty-four months of tax-deferred growth.
**The benefit here is for those who don't depend on their distributions for living expenses. The additional eighteen to twenty-four months of tax-deferred compounded growth can be material.
Clients Can Contribute to Their Traditional IRA After Age 70½
Beginning in the 2020 tax year, the new law will allow individuals to contribute to their traditional IRA in the year they turn 70½ and beyond, provided they have earned income. Note that the law applies to 2020 tax-year contributions, not 2019.
Example: Harold, age 75, is self-employed and earns income during 2019. Harold may not make contributions to his traditional IRA for the year 2019. However, Harold may make a contribution to his 2020 traditional IRA provided he has sufficient earned income in 2020. Note that Harold is still required to take his RMD's from his IRA, even though he also qualifies for contributions to the same IRA. Depending on Harold's marital status and joint income, he may be able to deduct his contribution and offset his taxable RMD.
**The benefit here is for those already receiving RMD's and still working, or those who are not receiving RMD's yet, but plan to stay employed past age 72.
Inherited Retirement Account (Beneficiary IRA's)
This is the change that should collectively have the largest financial impact. Prior to this law taking effect, the distributions from a deceased owner's IRA to a non-spouse beneficiary could be spread out over the lifetime of the beneficiary (i.e., a grandchild's life expectancy). It was referred to as the "Stretch IRA." However, the new law now mandates that distributions to non-spouse beneficiaries be made for a period not to exceed 10 years. There are exceptions for spouses, disabled individuals, and individuals not more than 10 years younger than the account owner. Minor children who are beneficiaries of IRA accounts also have a special exception to the 10-year rule, but only until they reach the age of majority.
Example: Janet, age 86, a widow, has listed her grandson, Artie, age 16, as the beneficiary of her traditional IRA. Under the old law, if Janet passes away this year, Artie would be required to take RMD's beginning in the year following the account owner's death, which in this case, Artie would be 17. He will have distributions withdrawn based on his life expectancy - thereby significantly lowering the RMD's and allowing the tax-deferred balance to grow larger. However, the new law will require Artie to withdraw the entire amount of Janet's traditional IRA (and pay tax on) by the time Artie is 26 years-old. In effect, the new law will fully tax the deceased owner's IRA within ten years, as opposed to the old law which let the tax-deferred IRA grow for longer periods.
a) Explore the Roth IRA - If you are the owner of a traditional IRA which you plan on leaving to a non-spouse, the new ten-year rule will accelerate the tax depending on the age of the beneficiaries. If the beneficiaries will be in higher tax brackets, it may make sense to explore the advantages of converting all or part of your traditional IRA to a Roth IRA. Tax will have to be paid in the year of conversion, but distributions of the Roth IRA to non-spouses can wait until the end of the tenth-year, thereby maximizing the compounded growth, and the earnings will be tax-free - even to beneficiaries!
See Anthony Carr's blog, "Roth IRA - Does it Make Sense After Tax Reform?"
Annuities allowed in 401(k) Plans
This new option will need more time and space to discuss. But for now, you can be sure that some 401(K) plans will begin offering annuities as part of their retirement plan. If investments within 401(K) plans are considered cumbersome now, just wait .......
At Carr Wealth Management, LLC, we believe financial advice is critical, and we strive to ensure our clients are up-to-date on information that can help them make better informed financial decisions. We specialize in providing low-cost, widely diversified, and tax-efficient investments. We help prepare financial plans designed to center on client goals instead of budgets and cash flow statements. Please contact us if you have any questions regarding this blog or if you would like to schedule a no-charge initial consultation.