How the SECURE Act May Affect Your Retirement

Just before Christmas, President Trump signed into law the SECURE Act, the most sweeping retirement account legislation passed in close to 20 years. The most significant changes that affect retirees include raising the age for Required Minimum Distributions (RMDs) for retirement accounts, and changing how retirement accounts are inherited by your heirs. The SECURE Act also intends to make retirement plans more accessible for younger workers.

For those at or near retirement age, the following are common questions regarding how the new law affects retirement planning:

Q:  How does the SECURE Act change Required Minimum Distributions (RMDs)?

A:  Under the old law, once you reach(ed) age 70 ½, you must begin taking taxable distributions from your IRAs, 401Ks and other retirement accounts (with some employer plan exceptions). Under the new law, the age is raised to age 72.

However, if you turned age 70 ½ in 2019, you are still subject to the old law, and will have to take an RMD in 2020.

Q:  What tax planning should be done to take advantage of the new RMD age?

A:  By increasing the RMD age to 72, you have an extra year or two to implement effective tax planning. This is due to the “sweet spot” of tax planning between retirement and age 72. This creates another year or two that you may be able to keep taxable income very low, and therefore take advantage of lower tax rates for capital gains and Roth conversions. This could potentially have an impact on your income taxes not only now, but well into the future.

Q:   Can I now add money to my IRA after age 70 ½?

A:   There is no longer an age limitation on making deductible IRA contributions. As long as you have earned income, you can make an IRA contribution regardless of age (within IRS guidelines for IRAs). However, if you are age 72 or older, you still must take your RMD, even if you make a contribution as well.

Important note: Deductible IRA contributions after age 70 ½ may reduce your ability to make Qualified Charitable Distributions (QCDs) in the future.

Q:  Did the rules change for making Qualified Charitable Distributions?

A:   Qualified Charitable Distributions (QCDs) are still allowed at age 70 ½. QCDs are a tremendous tax planning tool for people over age 70 ½.  With the new standard deductions created by the Tax Cuts and Jobs Act, fewer taxpayers are itemizing on their tax returns.  Unfortunately, this potentially reduces the tax benefit of your charitable contributions.

However, those over age 70 ½ can make QCDs directly from IRA to a qualified church or charity, and the distribution is not reported as taxable income.  Once you begin RMDs at age 72, the QCD will directly offset the taxable portion of your RMD.

While the SECURE Act raised the RMD age to 72, the QCD age stayed at 70 ½, allowing for more effective tax planning prior to age 72.

Q:   What happens to my retirement account when I die? What’s the big change?

A:    With few exceptions, the SECURE Act no longer allows beneficiaries of an IRA to take distributions over their life expectancy. This “stretch IRA” planning has been a significant part of estate planning, and the SECURE Act severely undercuts this opportunity.  Under the old law, when anyone other than a spouse inherited your IRA, he or she was allowed to take distributions from that IRA over her remaining life expectancy.  This allowed your heirs to continue the triple compound interest inherent in IRAs, as well as continue tax free growth of Roth IRAs.

Under the new law, with limited exceptions (see eligible designated beneficiaries below), any beneficiary other than a spouse must distribute the entire retirement account within 10 years of the date of death of the owner.  This includes IRAs, 401Ks, 403Bs, Roths, and any other kind of qualified retirement account. There are no rules during the actual ten years; the beneficiary may choose how and when to withdraw the funds, as long as the entire account is distributed within ten years.

Q:  What if I have already inherited an IRA?

A:   This new “10 year rule” applies to the beneficiary of anyone who dies beginning January 1, 2020.  So, if you previously inherited an IRA, you are effectively grandfathered in, and you may continue to “stretch” distributions over your remaining life expectancy.

Q:  What is an eligible designated beneficiary?

A:    An eligible designated beneficiary under the new law is allowed to use the old “stretch” IRA rules when inheriting IRAs, and consequently take distributions over his or her life expectancy. This includes Roth accounts. An eligible designated beneficiary is: a spouse; a minor child of the deceased (not a grandchild or any other relation); a beneficiary with a disability; someone chronically ill; and a beneficiary who is less than 10 years younger than the deceased account holder (such as a brother or sister, for example).

Q:  What happens once a beneficiary is no longer an eligible designated beneficiary?

A:  Once the beneficiary is no longer eligible, the IRA must be entirely distributed during the following 10 years. Most notably, this includes when a minor becomes an adult in his or her state of domicile, usually age 18 or 21. In addition, once an eligible designated beneficiary dies, the account must then be liquidated within ten years of the death of the eligible designated beneficiary.

Q:  What if I named a trust as beneficiary?

A: Naming a trust as beneficiary creates new complications. One reason many designate a trust as beneficiary is to control access to the beneficiary. Consequently, many trusts specify that only the minimum distribution will be distributed to the beneficiary each year. Under the new 10-year rule, the minimum distribution is zero until the 10th year after death, at which time the entire account has to be distributed.

Furthermore, there is a difference in IRA inheritance trusts that simply distribute IRA distributions directly to the beneficiary (conduit trust), which are then taxed to the beneficiary of the trust; and those that accumulate the distributions inside the trust (accumulation trust), which are then taxed at trust tax rates.

These complications could cause adverse tax consequences, among other challenges. If you have named a trust as a beneficiary of your IRA, you should contact your estate planning professional.

Ultimately, the SECURE Act presents both challenges and opportunities. If you would like to schedule an appointment to discuss how this new law affects your financial and estate plan, please do not hesitate to contact us.