Last summer, we wrote about pending legislation that would make changes to retirement savings rules. On December 20, 2019, President Trump signed the SECURE Act into law creating several new rules, which have broad-reaching implications.
KEY PROVISIONS OF THE SECURE ACT INCLUDE—
Changes to the RMD age: The SECURE Act raises the age at which individuals must begin taking Required Minimum Distributions (RMDs) from retirement accounts from 70.5 to 72 years old. The new law only applies to those who turn 70.5 after December 31, 2019. The SECURE Act does not change the age at which an individual can make a Qualified Charitable Distribution (QCD).
Contributions to traditional IRAs allowed after age 70.5: Individuals may now contribute to a traditional IRA after age 70.5, provided they have earned income.
New rules for inherited retirement accounts: New rules apply to retirement accounts inherited in 2020 and beyond. Under the old rule, the beneficiary of an inherited retirement account could distribute those assets over their lifetime (Stretch IRAs). Under the new law, those assets must be distributed within 10 years with exceptions for spouses, minor children, disabled individuals and beneficiaries less than 10 years younger than the decedent. Non-designated beneficiaries must still receive funds within 5 years if the account owner passes away prior to turning 72.
Penalty-free withdrawals for birth/adoption expenses: New parents can withdraw up to $5,000 from an IRA or retirement plan to pay for birth or adoption expenses—through the first year after birth or adoption. No penalties will be applied to the withdrawal, but taxes will be owed on any pretax contributions.
Kiddie Tax update: Unearned income for children has reverted to the parents’ top marginal tax bracket versus using trust tax brackets. This change may be retroactively applied to both 2018 and 2019 tax years, so consult with your tax advisor to determine the best course of action.
New rules for qualified plan sponsors: The new law contains provisions for qualified plan sponsors. Those provisions relate to part-time workers, provisions to help small businesses, annuity offerings in 401k plans and an annual disclosure of projected income requirement.
WHAT DOES ALL OF THIS MEAN TO YOU
- If you turn 70.5 in 2020, the date of your first RMD will move to the year in which you turn 72. As before, you may be able to delay your first RMD until April 1 of the year following your 72nd birthday, but in subsequent years, you must take your RMD by December 31.
- If you have earned income past the age of 70.5, consider making a traditional IRA contribution, which may provide benefits associated with a lower Adjusted Gross Income.
- If a Stretch IRA is a primary planning objective, revisit your plan to assess the impact of the SECURE Act. Consider Roth IRA conversion and/or Roth 401k participation as a possible strategy to mitigate the future tax burden on beneficiaries.
- If you currently have a conduit trust listed as a retirement account beneficiary, revisit your trust document to determine the impact the SECURE Act may have on this structure.
The most important step is to consult with your financial advisors. The team at NNP is ready to help you assess any potential impact the SECURE Act may have on you and your financial planning. Call us to discuss.