The SECURE Act has brought major changes to the retirement planning landscape for 2020 and beyond. For some time, I’ve been following the Setting Every Community up for Retirement Enhancement (SECURE) Act. Now that the retirement savings reform bill has become law, I wanted to offer an update on some of its provisions.
The idea behind the bill was to broaden the effectiveness of individual retirement accounts and employer-sponsored retirement savings plans. Essentially, it expands access to tax-advantaged retirement savings accounts and, ultimately, aims to help Americans save enough for a secure retirement.
Here are a few of the most impactful changes:
Increasing the Required Minimum Distribution (RMD) Age
Previously, qualified account holders had to withdraw RMDs in the year they turned 70.5. The SECURE Act increases that age to 72.
o Individuals who turned 70.5 years old in 2019 are required to follow the old RMD rules. This means if you turned 70.5 in 2019, you are required to take your first RMD no later than April 1, 2020
o Individuals who turn 70.5 years old in 2020 will not be required to withdraw RMDs until they are 72.
Traditional IRA Contribution Age
The SECURE Act also eliminates the maximum age for Traditional IRA contributions, which was previously 70.5 years old. There is no maximum age for Traditional IRA contributions, as long as you have earned income. This is a welcomed inclusion since the Traditional IRA was the only retirement account with that restriction.
Under previous law, beneficiaries who did not inherit their accounts from a spouse, in most cases, were allowed to withdraw RMDs over the span of their lives. This was often referred to as a Stretch IRA.
The SECURE Act requires beneficiaries to withdraw all assets by the end of the 10th year following the year of death. During the 10-year period, there will be no required minimum distributions during the first nine years.
There are five situations where the 10-year rule will not apply to a designated beneficiary. These five eligible beneficiaries are:
o Surviving spouses
o Chronically ill
o Not more than 10 years younger than the account owner
o Minor children
New Waiver of 10% Penalty for Early Withdrawals
In addition to the existing 10% waiver rules for early distributions on an IRA, the SECURE Act now includes an exemption for childbirth and adoption up to a maximum of $5,000. This exemption is not limited to IRAs as it also includes employer-sponsored plans.
The exemption allows each parent to use the $5,000, penalty-free, if each had separate retirement accounts.
The distribution(s) needs to happen after the birth of a child as a TIN is required. For adoptions, the child must be less than 18 years old for the 10% penalty waiver.
529 College Saving Plans
Up to $10,000 of 529 plan money can be used to pay off student loan debt. The $10,000 is a lifetime amount, NOT an annual limit. An Additional $10,000 can be used to pay off student loan debt for each of the 529 plan beneficiary’s siblings.
SECURE Act Winners
Increasing the RMD age and removing the maximum age to contribute to a Traditional IRA allows individuals to fund their Traditional IRAs longer and gives them a few additional years of tax-deferred growth.
With the 10% waiver for early withdrawal for childbirth and adoption, soon to be parents have an additional resource for short-term liquidity needs. Keep in mind these distributions will still be subject to income tax.
Those With Student Loans
With student loan debt climbing to $1.4 Trillion in 2019, the SECURE Act provides a way to reduce some, or all, of the remaining debt through 529 distributions. While I believe there is still work that needs to be done regarding student loans, this is a step in the right direction.
Federal and State Governments
With the death of the stretch IRA, instead of the federal and state governments collecting taxes over the life of the IRA beneficiary, they will collect the entire amount over no more than 10 years. If the average inheritance age is 40, under the old law, the beneficiary could have upwards of 40+ years of tax-deferred growth. With the new law requiring all assets to be removed by the end of year 10, ‘Cha-Ching’ for tax revenue.
SECURE Act Losers
Non-Eligible Beneficiaries of Traditional IRAs (Death of the Stretch)
It’s not a complete loss though. For those that have kicked around the idea of Roth conversions but weren’t sure if it was the right move, this may be the forced hand you needed. If you are concerned about the taxability of your wealth as you pass it on to your heirs, higher tax brackets in the future or you want to provide tax-free income to your heirs, you may want to consider Roth conversions.
As a whole, the SECURE Act will have more winners than losers. That said, with new laws that have multiple changes, each person will be impacted differently. Each person should review the protentional tax, retirement, and estate planning implications with their respective professionals to ensure no changes are necessary.