The Impact of the SECURE Act on your Retirement Assets
On December 20, 2019, Congress enacted the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The provisions of the Act come with opportunities and drawbacks for individuals beginning January 1, 2020. Our custodians are already in the process of updating their systems to incorporate changes introduced by the Act. The following information is a brief overview of the Act and does not include all changes brought on by the Act.
Required Minimum Distribution Age Extended
Beginning in 2020, retirees will no longer have to take required minimum distributions (RMDs) from traditional IRAs or retirement plans by April 1 following the year in which they turn 70 1/2. The new law requires RMDs to begin by April 1 following the year in which the retiree turns 72. RMDs for individuals who turned 70 1/2 in 2019 are not delayed and will continue under the pre-SECURE Act rules. If you were born on 7/1/1949 or later, your RMDs will be delayed until age 72.
Qualified Charitable Distributions (QCDs) are still allowed at 70 1/2. Even though an individual turning 70 1/2 will not have to take an RMD for 2020, they may still use their IRA to make a QCD of up to $100,000 for the year. Beginning at age 72, any amounts given through QCDs will reduce the then-necessary RMD as well.
Additionally, individuals who have earned income from wages or self-employment will be able to contribute to traditional IRAs beyond age 70 1/2.
“Stretch” IRA Eliminated
Under the former provisions, non-spouse beneficiaries who inherited a traditional IRA and/or retirement plan assets were allowed to spread distributions of the account over their lifetimes. Under the new law, any beneficiary of an account who is more than 10 years younger than the deceased account owner must liquidate the account within 10 years of the account owner’s death, unless the beneficiary is a spouse, disabled or chronically ill individual or minor child. If you are currently receiving distributions from a “Stretch”(Inherited) IRA, these distributions will be unaffected.
For beneficiaries who will inherit high-value traditional IRAs and retirement plans, the new rules could result in a higher than anticipated tax bill during the 10 year liquidation period. These new implications may prompt account owners to reevaluate beneficiary choices and their overall estate planning strategy. Some may choose to convert traditional IRA funds to Roth IRA funds, which are inherited income tax free.
Changes for Trusts as Beneficiaries
The SECURE Act introduced changes that will inevitably impact trusts named as retirement account beneficiaries. Many of these trusts are drafted in a way that only allow the RMD to be disbursed from an inherited IRA each year, with an additional requirement for that amount to be passed directly to trust beneficiaries. The SECURE Act provisions would make it so that there would only be one lump-sum distribution in the 10th year for any beneficiaries subject to the 10-Year Rule. Consequently, this would produce a high tax bill for
the beneficiary and the loss of asset protection after funds are removed from the trust. Additionally, the beneficiary would not have access to the trust assets for the 9 years prior to the lump-sum distribution in the 10th year.
Conclusion
- The age extension could serve as a benefit for you and your overall retirement plan by delaying when you are forced to make taxable withdrawals from your retirement accounts.
- The elimination of the “Stretch” IRA increases the importance of frequent beneficiary reviews.
- If you currently have a Trust listed as the beneficiary of your IRA or retirement plan, be aware that changes may be necessary to ensure your assets flow as intended.
This is not a comprehensive listing of the changes found within the SECURE Act. If you wouldlike more information on the entirety of the Act, please let us know. Your team at SFMG is here to help with any questions you may have.