After being passed by the House last summer and some hesitation by the Senate, the “SECURE Act” was signed into law at the end of 2019. SECURE stands for Setting Every Community Up for Retirement Enhancement and brings big changes to how to plan for retirement and how to best leave a legacy.
Of the many changes from the SECURE Act, the most relevant changes are:
- Required minimum distributions (RMD) do not begin until age 72. This only effects those turning 70 ½, the previous RMD age, after December 31, 2019.
- Contributions to Traditional IRAs are now allowed after age 70 ½, assuming income is earned through employment or self-employment. This, in-turn, will allow backdoor-Roth IRA contributions to be done well past the prior cut-off age of 70 ½ for those continuing to work.
- Qualified Charitable Distributions (QCDs) can still be utilized starting at 70 ½. You may know this more by practice than by name, which is the gifting money from your IRA directly to a 501(c)(3) charitable organization to avoid federal taxation on the gifted amount, up to $100,000 per year.
- A lifetime limit of $10,000 of 529 plan dollars can now be utilized to payoff student loans.
Elimination of the Stretch IRA: The most impactful change from the passage of the SECURE Act is the elimination of the stretch provision for inherited qualified accounts, such as Traditional/Rollover IRAs and Roth IRAs. Previously, when a non-spouse inherited a qualified account, they could stretch distributions over their lifetime. This allowed beneficiaries to take the inherited balance out in small increments relative to the overall balance, therefore stretching the tax burden of their inherited account over their lifetime. Now, if a non-spouse beneficiary inherits an account on January 1, 2020 or after, they will be required to take the full account value out within a 10-year period from the original owner’s death. Existing inherited IRAs are grandfathered under the old rule and are able to be stretched over the beneficiary’s lifetime. The rules regarding the stretch of inherited non-qualified annuities remain unchanged and can be stretched over the beneficiary’s lifetime.
Example (Pre-SECURE Act): John’s father passed away, leaving John a $1,000,000 IRA. John is able to stretch the required distributions from the IRA, based on calculation from the IRS Uniform Lifetime Table, over his lifetime.
Example (Post-SECURE Act): John’s father passed away, leaving John a $1,000,000 IRA. John is now required to take the entire $1,000,000 balance out over the next 10 years. John would likely take out $100,000 each year for 10 years, adding $100,000 to his taxable income each year.
The new rule is straightforward for individual beneficiaries, but if you have a trust as the beneficiary of your qualified retirement accounts, it should be reviewed by your advisor and estate attorney to ensure that any ‘see through’ provision is properly structured and worded. If unchanged, the sticking point could be that the trust would only allow one distribution of the inherited IRA in year 10, the last year of the requirement to distribute the inherited account. This would result in a potentially huge tax burden to the beneficiary(s) since they would realize their whole inheritance from the IRA in one year!
The stretch elimination, as well as the other changes, may influence or warrant adjustments to your overall financial plan. If you have any further questions about how this legislative change affects you, or the details of the other parts of the Act, please contact your financial advisor at Fragasso.
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