2019 SECURE Act - What is it?
You may be surprised to learn that 2019 ended with bipartisan support on one new law that may affect you. The SECURE Act (which stands for Setting Every Community Up for Retirement Enhancement), was passed almost unanimously (the votes were 417 to 3 in the House and 81 to 11 in the Senate). This law has many nuanced provisions, many which only effect a very small portion of the nation. However, there are a few key provisions which will impact many of our clients for years to come. As this affects many of our clients, we wanted to provide a quick, high-level overview of these changes.
2 Most Notable Changes to Retirement Accounts:
A.) The Required Minimum Distribution (RMD) age will now be 72 years old instead of the previous age of 70 ½.
To clarify, this effects individuals who have not reached 70 ½ by the end of 2019. If you were 70 ½ at the end of 2019, you remain under the prior rules.
One exception applies if you are still working past age 72. You can push out the RMD for your retirement plan at that company you until after the year you retire, assuming you own less than 5% of that company.
B.) Beneficiaries who inherit a Retirement Account will now be forced to distribute within a 10-year window. There will no longer be a forced annual RMD but all the funds in the IRA must be distributed by the 10th year.
Beneficiary IRAs established with a grantor passing away prior to January 1st, 2020 are grandfathered into the old rules which allow the IRA to be stretched over the life of the beneficiary.
There are 4 Exempt Groups from this new 10-year window:
- Disabled and/or Chronically Ill beneficiaries
- Individuals not more than 10 years younger than the grantor
- The grantors minor children (only until they reach age of majority)
Other Small Changes Worth Mentioning:
- 529 Plans can now be used to help pay off up to $10,000 of college debt. This potentially provides a unique arbitrage opportunity for those in states that provide a state income tax deduction. Time will tell if some of these states are unhappy to have what is essentially a new state tax break placed on them without their involvement.
- The cap on Traditional IRA contributions has been removed for those who continue to work past the age of 70.
- The list of exemptions to the 10% pre-59 ½ early distribution penalty has been expanded to include “qualified birth or adoption distribution.
Largest Negative Impact: Parents who completed Roth conversions so that the amount they did not use in retirement could be left as a tax-free gift for their children to use over their lifetime. Similarly, parents who are planning to leave their IRAs in trust for benefit of someone they wish to protect will need to revisit the merit of this plan.
Biggest Winners: The IRS and Wealthy Children. Not a joke. It’s been estimated the forced early liquidations of IRAs will generate about $15 Billion in tax revenue over the next decade. Further, the last few years, children have had their unearned income over $2,200 at trust tax rates. The SECURE act reverts this back to the parent’s tax bracket and the new rules can be retroactively applied for 2018 and 2019 if said child would benefit from a revised tax return.
New Planning Opportunities: Strategies will need to be customized to help individuals inherit IRA’s to strategically withdrawal over the 10-year window in a way that minimizes taxes. The penalty for taking an IRA in the wrong year could be nearly 50% in taxes.
As with all tax law changes, it will take time to understand all the impacts.
We are curious but don’t recommend holding your breath to see what the next legislative act is that receives near unanimous congressional support.
Let our team know if you have any questions.