The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law in December of 2019 and became effective January 1, 2020. We’ll touch on a few of the changes that may have an impact on you. Being such new legislation, further guidance will likely be needed on some of the complexities.
Required Minimum Distributions (RMDs)
If you turned or turn age 70.5 after December 31, 2019 (or age 70 after July 1, 2019) you can put off your first RMD until the year your turn 72. If you turned 70.5 before 2020, you fall under the old rules and must take your RMD for 2019 and continue doing so going forward. A one-and-a-half-year break for the youngins.
Stretch IRA / Inherited IRA
In many cases, you can say goodbye to the stretch IRA. Previously, the inheritor of an IRA could “stretch” the required minimum distributions (RMD) over his/her lifetime rather than that of the original account holder, thus in most cases stretching out the life off the account and keeping taxes as minimal as permitted by RMD tables. Beginning for deaths after December 31, 2019, the stretch is gone (exceptions coming), and the account must be drained by the end of the 10th calendar year. The balance can be withdrawn as desired, so long as it’s gone by the 10-year deadline. For example – entire balance in year 1, equal increments over the 10 years, entire balance in the 10th year, etc. In most cases, this is going to force larger withdrawal amounts and therefore a larger tax burden. However, there are five classes of exceptions that are exempt from the 10-year rule and can still stretch the RMDs over their life expectancy. These “eligible designated beneficiaries” include surviving spouses, minor children, disabled individuals, the chronically ill, and beneficiaries not more than ten years younger than the IRA owner. For deaths in 2019 or prior years, the old rules remain in place. This could make the case for Roth IRAs to become more popular and to be used as a creative planning tool. Being in an era of lower tax brackets with the Tax Cuts and Jobs Act (TCJA), Roth conversions now could be a strategy to help reduce the tax hit when thinking multigenerational planning. Pay conversion taxes now, while in the lower TCJA brackets which are scheduled to expire at the end of 2025. Unless those brackets are made permanent or extended, almost everyone will be in a higher bracket, including beneficiaries. The money can then be later withdrawn tax free, per Roth rules.
Deductible IRA Contributions & Qualified Charitable Distributions
You can now make deductible IRA contributions beyond age 70.5, so long as you have earned income. Be cautious though, because if you are charitable minded and make qualified charitable distributions (QCDs), the contribution amount will offset the QCD and it will become a taxable distribution. Example: you make a deductible contribution of $5000, and then make a charitable distribution for $10,000, $5000 of the distribution becomes taxable as an ordinary distribution.
As always, tax and retirement laws can change at any time. Please consult your tax advisor if you have questions.