Last Gift Under the Tree
While many of us enjoyed the peak of holiday festivities with family and tried to avoid whatever bug was going around, Congress delivered a gift of its own (sort of): the SECURE Act. The Setting Every Community Up for Retirement Enhancement Act, signed into law on December 20, 2019, made several notable changes to existing retirement account rules.
Increase RMD Age from 70.5 to 72
At a certain age, individuals are required to begin taking Required Minimum Distributions (RMDs) from most types of retirement accounts (IRAs, 401(k)s, 403(b)s, TSPs) so that the IRS can begin getting paid through income tax on the distributions.
The SECURE Act keeps most of these rules the same, but increases the beginning age for this requirement from 70.5 to 72, extending the time that the funds can grow tax-deferred. Keep in mind, there is still a 50% IRS penalty on any RMD not taken by the deadline.
Before the SECURE Act, there was a ‘stretch’ provision so non-spouse beneficiaries could inherit a retirement account and stretch out their Required Minimum Distributions over the course of their lifetime. These annual RMDs are included in their taxable income.
The SECURE Act eliminates this stretch provision. Those who inherit an IRA after 2020 are now required to empty the account within ten years of the original owner’s death. For Inherited Traditional IRAs, where distributions are taxable income, this accelerated schedule may have substantial tax implications. For Inherited Roth IRAs, where distributions are usually tax-free, this decreases the potential time for investments to grow tax-free.
Kimberly is 50, inherits a $1M IRA from a parent in 2020. Under the old rules, Kimberly could distribute a small annual percentage for the rest of her life (potentially 30+ years.) Under the SECURE Act, Kimberly would need to empty the account by age 60. If Kimberly is in her peak earning years, as many people are in their 50s, adding $100k to her taxable income each year would have serious tax ramifications.
Small Employers, College Funding, Birth/Adoption
The SECURE Act includes several other updates to current rules, including: provisions to help small employers offer retirement plans, encouragement of auto-enrollment in employer plans, expansion of retirement plan eligibility to certain part-time employees, elimination of the age cap (70) on IRA contributions, allowance for 529 funds to be used to pay down student loans ($10,000 annually), penalty-free 401(k) withdrawals to pay for adoption or birth costs (up to $5,000), and lowered barriers for plan sponsors to offer annuities in their plan.
It’s No Joke
With everything else that usually goes on during the end of the calendar year, the SECURE Act would be
easy to overlook. But these rule changes are set to significantly impact how we use retirement accounts. Every person’s situation is different, and for each one, there are strategies that can be used to plan for the SECURE Act’s many wrinkles. While you’re warming up to spring, and maybe fending off some seasonal allergies, remember the SECURE Act is no April Fools’ Day joke.