How the SECURE Act Has Reshaped Retirement Plans
How Changes to Inherited IRA Rules, RMDs May Affect You
Several important changes for Americans’ retirement savings plans and for employers who offer them occurred when the SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019 was signed into law by President Donald Trump on Dec. 20 last year. Probably most significant for many of Altfest’s clients are new limits on how long most non-spouse beneficiaries can “stretch” distributions from an inherited IRA, and adjustments to how people aged 70½ and older are required to withdraw from — and can contribute to — their retirement plans.
End to ‘Stretch’ IRAs
The law is aimed at increasing access to retirement plans and easing barriers to sufficient retirement savings, but it’s not uniformly favorable for all. As of Jan. 1, 2020, most non-spouse beneficiaries of inherited IRAs, 401(k)s and other defined contribution retirement plans have a 10-year cutoff after the death of the plan’s owner — rather than the remainder of their lifetimes — to spend down these accounts. For some, this escalated timeline for emptying the inherited account may have negative tax implications. However, the new “10-year rule” for withdrawals does not apply to spousal beneficiaries, nor does it change rules for the disabled and chronically ill, beneficiaries 10 years or fewer younger than the deceased or certain minor children of the retirement account owner before they reach the age of majority in their state.
As a result of this change, it’s important for our clients to review their retirement account beneficiary designations, to make sure they are in line with the updated beneficiary rules. Furthermore, clients with a trust featuring a “pass-through” feature allowing a non-spouse beneficiary of an inherited IRA or employer-sponsored plan like a 401(k) to prolong the fund’s tax benefits should consult soon with their Altfest adviser to ensure the trust’s language still matches with their long-term goals.
RMD Delay Allowed
Another standout provision of the SECURE Act relieves older retirement savers from being forced to start often-taxable required minimum distributions (RMDs), if they wish to delay. Now, retirement savers can wait until April 1 of the year following the day they turn 72 to take their first RMD. This change applies only to individuals who turn 70½ in 2020 or later.
On a positive note, this pushback of the RMD starting age does not apply to the ability to make qualified charitable distributions (QCDs) from IRAs, which are still permitted beginning at age 70 ½. These vehicles allow for tax-protected charitable giving of up to $100,000 in a year from an IRA, which remains the same once the person turns 72. Under the new law, any amounts given to a charity through a QCD by someone 72 years of age or older will reduce the person’s necessary RMD as well. Before age 72, QCD giving merely allows pretax IRA funds to be used for charitable contributions.
Later IRA Contributions
Another key change is being able to continue contributing to one’s tax-deductible Traditional IRA after age 70½, as long as other conditions for contributions are met. This revision in 2020 recognizes the interest of increasing numbers of seniors in working part-time at an encore career or earning from the gig economy, and lets them keep paying into their IRAs up to $7,000 a year as an individual, or $14,000 a year as a couple.
‘Kiddie Tax’ Reversal
For clients with children, the SECURE Act gives more leeway by repealing the so-called Kiddie Tax. In a reversal of an arrangement delivered in the Tax Cuts and Jobs Act of 2017 (TCJA), the SECURE Act again makes any unearned income of one’s dependent children taxable at the parent’s top marginal tax rate, rather than being subject to trust tax rates.
For modest children’s unearned income, the TCJA adjustment often resulted in some tax savings. Before, children with unearned income received the first $1,100 tax-free, and the next $1,100 was taxed at the child’s rate. Earnings over $2,200 were taxed at the parent’s rate. TCJA changed that level of income’s rate to the trust income-tax rates, which could be much higher than the parent’s rate.
The recent change has a lookback effect, as it’s effective for tax years beginning after Dec. 31, 2018, but taxpayers also can elect to apply the new rules retroactively to tax years starting after Dec. 31, 2017. Clients who have children with substantial unearned income in the last two years can simply opt to use the new rules to their benefit at tax time, including amending 2018’s return.
Added Benefits for Employers
The SECURE Act eases the way for our clients who are employers — including doctors, dentists and other medical professionals — to set up retirement plans for their employees for the first time, if they haven’t already done so. More small businesses can join together under the act to offer what are known as pooled Multiple Employer Plans, or “open MEPs.” But the new law’s MEP rules don’t take effect until 2021, so this change will be less immediate.
If your business or medical practice has employees who work part-time, the new law offers an entry point for them to eventually save in your sponsored retirement plan, in some cases after putting in at least 500 hours a year for three years to be eligible, starting with Jan. 1, 2021.
In addition, the act puts in place “safe harbor” protections for employers who want to let employees in their retirement plan convert some of their plan savings into guaranteed lifetime income annuities. If you own your practice, the new law shields you from liability if the insurer providing annuities to your employees fails to pay claims in the future.
If you have your own workplace 401(k) or other defined contribution plan, we can help you figure out whether you can take part in this potential feature, and how it fits with your long-term retirement goals. This SECURE Act provision also adds an annuity portability feature for people who change jobs after it takes effect at the beginning of 2021, but it may take years for a large number of Americans to embrace guaranteed lifetime income as a part of their defined contribution plans.
Speak with Your Altfest Advisor
The SECURE Act brought many changes. Make an appointment with your Altfest wealth management team to help ensure you are positioned the way you want to be.
- Most stretch IRAs for non-spouse beneficiaries are significantly curtailed. That means it’s time to review your beneficiaries!
- You don’t need to start taking RMD payments until age 72, if you haven’t started taking them already.
- If you are or have already filed a “Kiddie Tax” return in 2018 or 2019, you have the option of two different tax calculations – speak with your advisor or accountant.
- IRA contributions are no longer limited by age. Think about contributing to tax-advantaged retirement savings accounts if you are over age 70.5 and still working.
- There are new incentives for small-businesses to start retirement plans. Consider setting up a plan for your practice and employees, if you don’t already have one.
Steven Novack, CPA, CFP®, MBA, works with clients and their families to develop and execute financial plans designed to achieve their personal and financial goals. Steven is a graduate of The George Washington University and New York University.
The foregoing content reflects the opinions of Altfest Personal Wealth Management and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Past performance is not a guarantee of future results. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.
Altfest does not provide tax, legal, or accounting advice. In considering this material, you should discuss your individual circumstances with professionals in those areas before making any decisions.