Seven Things To Know About The SECURE Retirement Act
I’m always leery of new government programs with a fancy acronym for a name that is supposed to simplify my taxes, or anything else. Rarely does the government roll out anything that “simplifies.”
Such is the case with the new SECURE Act.
Congress passed this for implementation in January 2020, despite the fact that most financial organizations are just now sifting through the details in an attempt to determine how this will impact their clients.
The stated goal is to simplify American’s retirement security. In reality, this act is estimated to increase tax revenues by more than $15 billion over ten years.
Although we know the majority of the SECURE Act details, the final interpretation will remain fluid. As such, expect modifications throughout the year.
The key points affecting most Americans are:
1) People who work past age of 70 ½ can continue to contribute to an IRA. As life spans expand, this is key to making money last.
Currently, about 30% of people age 70 or older remain employed. As such, regardless of age, if you have earned income you can fund a Traditional or Roth IRA.
As before, a Traditional IRA contribution may lower current income taxes. Although a Roth IRA will not lower current taxes, the growth is tax-exempt and not subject to a Required Minimum Distribution.
2) Previously, once a person turned age 70 ½ they were assessed a “Required Minimum Distribution” from their Traditional IRA or 401k. Due to extended life spans, the start date for RMD’s now starts at age 72.
However, if you already reached age 70 ½ prior to 2020, you must continue taking RMD’s.
3) If you are taking your RMD, but still gainfully employed, you may be able to turn right around and contribute to either a Traditional IRA or a Roth IRA. As with the previous rule, IRA contributions are limited. This can extend your retirement savings and possibly lower your current taxes.
4) If a person is subject to Required Minimum Distributions, they may donate all, or part, of the RMD to a qualified charity. A Qualified Charitable Distribution is still limited to $100,000 per year and must be made directly from the IRA to the charity. As such, coordinate this with your IRA custodian.
The donor will not be taxed on the distribution going to the charity and the charity receives the full value of the distribution.
5) Previously, a non-spousal beneficiary of an Inherited IRA had Required Minimum Distributions based upon the beneficiary’s expected life span. For young beneficiaries, this could stretch distributions for decades.
Under the new law, adult beneficiaries who inherit IRA’s will be required to take a full distribution within ten years. The new law does not apply to spousal beneficiaries.
This will require greater scrutiny of when to take distributions based upon your individual tax picture in a given year.
For instance, assume in year three a beneficiary is unemployed or has very low taxable income. In that particular year it may make sense to increase withdrawals to fully use up lower tax brackets.
Otherwise, if you wait until year ten you will benefit from ten more years of tax deferral, but the entire balance will come out in one year. Depending upon where you live, the tax impact could be more than 40%.
This new rule should also increase consideration of Roth conversions at current low tax rates.
Because of the forced distribution of IRA assets, inheriting an IRA within a trust may no longer be wise. As such, it is time to re-evaluate this strategy as some types of trusts climb into the top income tax brackets very quickly. Conversely, inheriting an IRA in a trust may slow a spendthrift down from blowing all the money at once.
6) The new law allows penalty-free withdrawals from retirement plans for limited birth or adoption expenses. However, the distributions are still subject to income taxes.
7) Tax-free distributions from 529 college savings plans are now allowed for registered apprenticeship programs and up to $10,000 in student loan payments. The $10,000 limit is per beneficiary of a given 529 plan.
Given these potentially significant changes, now is a good time to familiarize yourself with how these rules may impact you and your family. Double-checking implementation aspects will be wise as some details may change throughout 2020.
Dave Sather is a Certified Financial Planner™ and owner of Sather Financial Group. His column, Money Matters, publishes every other week.