SECURE Act

The SECURE Act - What You Need to Know

President Trump signed the SECURE Act into law as a part of the spending bill that was passed in late December 2019. The SECURE Act - which stands for “Setting Every Community Up for Retirement Enhancement” – is the most comprehensive retirement reform in over a decade. The numerous provisions are intended, in part, to improve retirement saving opportunities for workers and combat the retirement income crisis. With 125 pages of legislation and over 30 provisions, we’ve done our best to summarize the most pertinent changes. We will continue to analyze the effects that the regulations will have on those in or nearing retirement, and we will be working to identity those of you that may be directly affected by the changes.

Stretch IRA Elimination

What is it? Before the SECURE Act, non-spousal inherited IRA owners were given the option to “stretch” distributions based on their own life expectancy calculation. This strategy was widely adopted in order to spread out the tax liability associated with IRA withdrawals. However, for most beneficiaries, the new legislation eliminates this option. Instead, non-spousal inherited IRA owners must now distribute the entire account balance within 10 years following the year they inherited the IRA from the original account holder.

Who is affected? Those who inherit an IRA or defined contribution plan (Ex. 401(k)) from someone who has passed away after 12/31/2019. However, there are a few exceptions: assets left to a surviving spouse, a minor child, a disabled or chronically ill individual, and beneficiaries who are less than 10 years younger than the original account owner.

For those of you that already have an inherited IRA, you get to keep taking distributions using the life expectancy calculations, as long as the decedent’s date of death is prior to 1/1/2020.

How can DCM help? In partnership with our Financial Planning department, your Advisor will analyze your individual financial plan in case any changes need to be made based on your goals. In most cases, the priority first and foremost will be to continue to protect your nest egg and generate the income that you need from your investments. After that, we may consider strategies that help ease the tax burden on your heirs, while taking into consideration your tax situation. It may be necessary to review your estate plan and evaluate your current beneficiary designations.

In the event that you have named a Trust as a beneficiary of a qualified retirement account, any such scenario should be reviewed with your Advisor and estate attorney, as this new rule does present possible complications from this estate planning strategy.

Required Minimum Distribution (RMD) Age

What is it? Before the SECURE Act, qualified retirement account owners were required to begin Required Minimum Distributions from their accounts in the year they turn 70 1/2. The SECURE Act has changed the RMD age to the year the person turns 72.

Who is affected? For those born on or prior to June 30th, 1949, you must continue using the old rule (age 70 1/2). If you’re born July 1st, 1949 and after, you get to wait until age 72.

How can DCM help? If you’re nearing either age and you have questions or concerns about the RMD rules, please let us know. Each year, our Client Services Managers work with all clients who have an RMD to help ensure those requirements are satisfied.

One small caveat to the rule is that Qualified Charitable Distributions (QCDs) are still allowed beginning at age 70 1/2. This is good news for anyone who is nearing 70 1/2 and planned to begin using QCDs as a means of charitable giving and as a tax reduction strategy.

Putting this rule into perspective, it’s estimated that 80% of IRA owners already withdraw more than their RMD in order to meet their retirement living expense needs[1]. Because of this reality, the ability to delay withdrawals until 72 is primarily benefiting individuals who have income sources in addition to qualified accounts to meet their spending needs.

Other Provisions

While those two provisions are the most pertinent for DCM clients, there are a few others that may be relevant for you, including:

• IRA Contribution Age Limit Removal - For the 2020 tax year and beyond, the rule eliminates the age limit in which someone can contribute to an IRA (previous age limit was 70 1/2). As long as you have earned income, you can continue to contribute to an IRA equal to your earned income, up to $6,000 plus an additional $1,000 catch-up for those age 50 and over.
• Childbirth or Adoption Expense Allowance - There is now a $5,000 qualified distribution allowed for childbirth or adoption expenses from retirement accounts, penalty free (although still subject to income tax).
• 529 Plans Added Two Provisions:
  • Funds can now be used for costs associated with apprenticeship programs that are registered with the DOL.
  • Funds can now be used to pay down student loan debt; $10,000 lifetime limit per person, but with an additional $10,000 allowed per 529 plan, per each of the beneficiary’s siblings.
• Reversal of the Kiddie Tax to Fiduciary Tax Rates - Instead of children’s unearned income being taxed at the Fiduciary/Trust tax schedule, this is now reverted back to the parent’s marginal tax rate. This applies to minor children as well as children that are full-time students from age 19 to 23.
• New Tax Credit for Small Business Owners - A new tax credit is now available for small business owners that offer a qualified retirement plan to their employees. The credit is $500 for startup costs, but the company must have 100 or fewer employees. There is also an additional tax credit for incorporating auto enrollment features for employees.
• One Bad Apple Rule Elimination - Previously, a violation of the plan qualification rules by one participating employer can jeopardize the entire multiple employer plan (MEP) tax-qualified status. The elimination of this rule should make it more attractive for business owners to join MEPs and offer a retirement savings plan option to workers.

[1] https://www.kitces.com/blog/secure-act-2019-stretch-ira-rmd-effective-date-mep-auto-enrollment/