SECURE Act Update — How Could It Affect Your Retirement?

SECURE Act – Implications for You Written by Mary Ann Ferreira, Financial Advisor & Shareholder

While we were all preoccupied with decorating Christmas trees, lighting Hanukah candles and/or other Holiday festivities, a new Federal law was quietly passed and went into effect on January 1, 2020.  This law, dubbed the Setting Every Community Up for Retirement Enhancement, or “SECURE” Act, was signed into law December 20, 2019.  Below are some of the major components of the new law; some don’t have a huge impact, but others, e.g., IRA beneficiary distribution changes, will have a major impact on many of our clients who have large IRAs or other tax-deferred retirement plans:

IRA Required Minimum Distribution (RMD) Age Changed from 70½ to 72: For those who will turn 70½ in 2020 and beyond, required minimum distributions (RMDs) can be postponed until the year in which you turn age 72. 

No Age Limit on IRA Contributions: There is now no age limit on contributions to an IRA, as long as you have “earned” income (from working, not investments).  Spousal contributions are included. 

QCDs Can Still be Done after 70½, but…You may still have Qualified Charitable Donations (QCDs), i.e., up to $100,000 go from your IRA directly to charities, starting at age 70½.  Note, however, that one of the big attractions of QCDs is using them to offset part of RMDs (to keep that portion of the RMD from being taxable), so anyone turning 70½ after January 1, 2020 won’t get that benefit until they turn 72 (when RMDs must begin).

IRA Beneficiary Distribution Changes: This is a big change with major implications for anyone with large IRAs.  In the past, if you were a non-spousal beneficiary of an IRA (e.g., children or grandchildren), you were required to take yearly distributions from the IRA or retirement plan, with the amounts based on your life expectancy (per federal RMD tables).  This was sometimes referred to as the “stretch” provision because beneficiaries could stretch withdrawals over their lifetime, which was often many decades. 

With the new law, this changes dramatically, eliminating long-term stretch treatment for the next generation.  For deaths after January 1, 2020, non-spouse beneficiaries will be required to fully distribute their Inherited IRA or retirement plan within 10 years of the deceased owner’s death.  Unlike previous Inherited IRA requirements, there doesn’t need to be a required minimum distribution (RMD) every year, but the entire account must be distributed by the 10th year. 

Exceptions to this withdrawal timetable include spouses, minor children (until the age of majority), persons with disabilities, chronically ill persons, or beneficiaries within 10 years of the age of the IRA owner.  These groups will continue to take RMDs over their lifetime. 

Those who have a Trust named as beneficiary of an IRA should have their Trust reviewed.  If the Trustee of the Trust does not have control over the timing of distributions, and if they are not required to distribute money annually, the beneficiary could be adversely affected by receiving the full distribution in year 10.  Also, if the Trust requires that distributions stay in the Trust, they will be subject to trust tax rates, which are far higher than most individual tax brackets (any trust income over $12,750 is subject to the 37% federal tax bracket).

For people with very large IRAs, this change in the law can have very negative consequences.  In order to avoid children facing huge tax bills, it may make sense to begin or accelerate Roth conversions.  It might also be worth leaving IRA money, rather than after-tax assets, to charity.  Be sure to discuss this with your Viridian advisor.

$5,000 IRA Withdrawal for Adoption or Birth, Penalty Free: Up to $5,000 may be withdrawn penalty-free (taxes still applicable) for a qualified birth or adoption, if taken within one year of the date of birth or adoption. This can be done per child and per parent if each parent has an IRA or other tax-qualified account.

Expansion of 529 College Savings Plan Use: The Secure Act allows the use of 529 plan assets for apprenticeship programs, and it can cover books, fees, supplies, etc.  In addition, Qualified Education Loan Repayment distributions may be used to pay the principal and/or interest of a qualified education loan up to a limited lifetime distribution of $10,000. This change is retroactive to the beginning of 2019.

Easier to Purchase Annuities in 401(k)s: Critics consider this part of the Secure act a major win for the powerful insurance lobby, which pushed for its inclusion.  Before the Secure Act, fiduciaries were at risk in a retirement plan if there was an annuity investment option and the annuity wasn’t able to meet its obligations, among other things.  The Secure Act removes much of the risk so long as the Fiduciary provided objective, thorough and analytical searches for carriers. Now, most of the onus is put on the insurance companies.

Caution Warranted: There is much more to this rule but one thing that stands out is that, rather than being forced to sell or surrender an annuity if you leave the retirement plan, the annuity is “portable.”  Before purchasing an annuity in your 401(k), ask about its portability. The law now permits it to be rolled out to an IRA, so we will likely be seeing a lot of smaller annuity products being rolled out of 401(k)s.  Individuals should carefully consider whether an annuity is right for them, taking into consideration associated fees in the product itself.  Annuities are not as easy to unwind as mutual funds, which are generally a liquid alternative in most plans.

Proponents say annuities can offer a steady stream of income to retirees, and that they encourage savers to think about the long-term.  However, annuities are complex investment products, and the wrong choice can be detrimental to a person’s portfolio.  Employees should review their options and consult a financial adviser (one who isn’t being paid a commission if you buy the annuity) before moving forward. Annuities often entail both heftier fees and penalties if used incorrectly.

Small Business Retirement Plan Credit (and Auto-Enroll): In prior years, small businesses were eligible for a credit up to $500 for up to three years to compensate for the start-up costs of a retirement plan.  Many of those plans state that 1,000 hours is the minimum amount of time worked to be eligible for the plan.

With the Secure act, the maximum credit is the greater of:

  1. $500 or
  2. $250 times the number of employees eligible to participate, or $5,000, whichever is less.  

For those small businesses who also adopt an auto-enrollment program, they will be allowed a $500 credit. Eligibility requirements have largely decreased from the prior 1,000 hour minimum to 500 hours minimum hours worked to become eligible.

Repeal of the TCJA Kiddie Tax Bracket Changes Back to Parent Brackets: The Tax Cut and Jobs Act (TCJA) changed the taxation of unearned income of certain children to become subject to trust tax brackets, instead of the parents’ tax bracket. That meant that any income over $12,750 was subject to the 37% federal tax bracket.

The Secure Act reverts the tax brackets back to the parents’ brackets.  Parents can elect to amend returns for 2018 and 2019 to pick their preferred method for taxation.

Medical Expense Deduction Hurdle Back to 7.5%: In previous years, medical expenses could be deductible so long as they were greater than 7.5% of your Adjusted Gross Income. The TCJA had raised this rate to 10% going forward but allowed for a 7.5% retroactive rate for 2018.

With the Secure Act, the hurdle is again 7.5% of AGI for 2019 and 2020. Taxpayers will want to review all medical expenses to see if they would be deductible.

Disaster Relief Provisions: If you suffered an economic loss to your principal residence as a result of a federally declared disaster, you can now take a distribution of up to $100,000 from an IRA, penalty free. You are still liable for taxes on the distribution, but an election can be made to treat the distribution as if it was taken over 3 years.  It may also be repaid to the IRA in three years.

Tax Extensions:  Extensions may be made retroactively from 2018 through 2020 only.

This is just an overview of the changes.  If you have any questions, please give your Viridian advisor a telephone call.

Viridian is an SEC Registered Investment Advisor (RIA) with clients across the United States. Viridian offers financial planning, investment management, and tax services (through its sister company, Viridian Tax and Accounting).

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