SECURE Act Becomes Law

As you may have heard, right before the end of 2019 the government gave us the SECURE (Setting Every Community Up for Retirement Enhancement) Act. There’s a lot to it, but I’ll try to stick to the high points that are likely the most relevant to you.

No more stretching…

Let’s look at what will probably have a negative impact for many families. If you are planning to leave a retirement account to your kids or grandkids, they will generally no longer be able to take the proceeds over their life expectancies. This was known as “stretching” and allowed non-spouse beneficiaries to slowly withdraw (and pay taxes on) inherited retirement account balances that they didn’t necessarily need right away.

Going forward they’ll have to draw down the balance within ten years, paying taxes at a faster rate than would normally be the case. I recently read that this could generate almost $16 billion in tax revenue for the Treasury over the next ten years. This, at least in part, is how Congress paid for other changes in the new law.

Here are some important details:

1) This doesn’t apply to leaving retirement accounts to your spouse. The surviving spouse simply treats it as their own. This hasn’t changed.

2) The ten-year window doesn’t apply if you have already inherited a retirement account, just newly inherited accounts going forward.

3) If your estate planning documents leave your retirement account to a trust for the benefit of heirs, you should re-evaluate that decision. The reasons have to do with taxes and potentially different stretch provisions available to some types of trusts.

4) If your traditional (non-Roth) retirement account balances are likely to create distributions for your heirs that could cause them to pay higher taxes than you currently do, Roth conversions to prepay their taxes could help.

Continue reading…

Taking Required Minimum Distributions (RMD) a little later…

And a small but helpful change – RMDs from retirement accounts will now begin at age 72 instead of age 70½. Other details, such as penalties for not taking RMDs, remain largely the same.

Also, Qualified Charitable Distributions continue to have a 70½ start age even though you may not be taking an RMD yet. It’s a weird quirk but I’m glad Congress left this in as it benefits charities across the country.

Keep saving a little longer…

Those over age 70½ who have wage income can now contribute to an IRA. Previously this wasn’t allowed unless the income was from self-employment.

While not in the Act but still linked to it, beginning in 2021 the IRS will tweak the life expectancy tables we use for the calculation of RMDs. This means that RMD amounts will go down slightly to reflect longer life expectancies. Apparently only one in five Americans of RMD-age takes just the minimum, so the benefits to this change will be muted, but it’s still an important update.

Again, the SECURE Act updates many more areas, but these are the big changes to retirement planning fundamentals. I’ll write about other changes in coming weeks.

Since some of these provisions haven’t been updated for decades, there’s likely to be a lot of confusion. Please feel free to ask questions about how all of this impacts your plans.

Have questions? Ask me. I can help.

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