SECURE Act is Official!
“Setting Every Community Up for Retirement Enhancement”
After months of speculation the SECURE Act is now official. There are several parts to the SECURE Act; however I will summarize the main provisions that will impact our clients, prospective clients and additional blog readers.
Required Minimum Distributions (RMD’s)
Prior to the SECURE Act, the age required for your first Required Minimum Distribution (RMD) was the year you turned 70 ½. If you turn 70 ½ in 2020 or later the new age requirement for your first RMD will be age 72. If you turned 70 ½ prior to 2020, the old rules will continue to apply.
You will still have the option to delay your first (age 72) required minimum distribution until 4/1 of the year AFTER you turn 72. If you elect this delayed strategy, you will then need to take 2 distributions the following year. You will need to distribute your age 72 distribution by 4/1 and your age 73 distribution by 12/31.
The positive is you may have an additional year to complete Roth IRA conversions which should actually lower your RMD at age 72 and older. If you elect to employ this strategy, it’s critical you work with a qualified, experienced advisor as conversions can cause other ancillary negatives for income taxation and Medicare premiums.
The slight negative in my opinion; suppose the markets continue their upward decent and you do not take a distribution until required at age 72. Your account balance will be larger which will increase the dollar amount required to fulfill your RMD. This can push you into a higher marginal bracket (minimal impact), however could increase your Medicare Part B and D premiums which is problematic.
“STRETCH IRA” Significantly Revised
Prior to passage of the SECURE Act, a NON-SPOUSE beneficiary was able to “stretch” distributions over their life expectancy. We have many children who have inherited IRA’s from their parents who are employing this strategy which can enable the funds to last a lifetime while still providing annual distributions.
For designated beneficiaries who inherit a retirement account in 2020 and beyond the new standards is the “10-Year Rule”.
Under the 10 Year Rule, the entire inherited retirement account must be emptied by the end of the 10th year following the year of inheritance. Prior to the end of the 10th year, there are NO distribution requirements.
For example, a 50 year old inherits and IRA from their parent. Under the old rule, the 50 year old would be required to take required minimum distributions over an approximate 34 year period, providing opportunity for significant tax-deferral. Under the new rule, the tax-deferral benefit is for just 9 years whereas the account must be fully liquidated by end of the 10th year.
Because of the change, a tax discussion is imperative to determine how to distribute the funds over the shorter time period.
There are some exceptions however. The new rule does NOT apply to:
- Spousal beneficiaries,
- Disabled beneficiaries (as defined by IRC Section 72(m)(7), –
- Chronically ill (as defined by IRC Section 7702B9©(2)
- Individuals who are not more than 10 years younger than the decedent.
- Certain minor children but only until they reach the age of majority.
**If the beneficiary of your IRA is an IRA Trust for the benefit of a non-spouse, it’s extremely important you discuss the new act with your Estate Planning Attorney for specific guidance.
Traditional IRA Contributions
Prior to the SECURE Act, contributions to a Traditional IRA were prohibited beginning the year you turned 70 ½. The SECURE Act now states you can continue to make contributions to a Traditional IRA at any age, provided you have compensation from either wages or self-employment. This also includes contributions to a Spousal IRA, where one spouse’s income can be used for both spouses to qualify for contributions.
There are a handful of other changes, most I believe will not impact any readers however here is the list:
- New Exception to the 10% Early Distribution Penalty for Childbirth and Adoption
- Small Businesses Can Get a Larger Tax Credit for Establishing a Retirement Plan
- Small Business can obtain a credit for adoption of Auto-Enrollment for Participants
- Long-Term Part-Time Workers are Provided Greater Access to Employer Plans
- Barriers To Establishing/Maintaining Multiple Employer Retirement Plans are Reduced
- Taxable Non-Tuition Fellowship and Stipend Payments Treated as Compensation for IRA Purposes
- Nondeductible IRA Contributions can be made with Certain Foster Care Payments
- No More 401K Credit Cards (Prior to, loans could be made via a credit card)
- More Retirement Plans can be adopted after Year-End
- Increased Penalties for failing to file returns
For existing clients I’ll be reviewing the impact of the SECURE Act at our upcoming review meetings. If you’re a non-client, please feel free to call or visit our website to schedule a complimentary consultation! Scheduling can be done online by visiting us here. Don’t see a time that works for you? Give our office a call (856-354-3200) and see what other dates and times are available.