What is the SECURE Act?
/By: Jarret Sheets, CFP®
Welcome to the new year (and decade)! Many take this time of year to look forward and plan for the upcoming year (or decade in this case). One thing we can plan on for sure is that the Setting Every Community Up for Retirement Act (SECURE Act) is officially becoming a law, and changes to how we plan for retirement come along with it. In this article I will discuss the new SECURE Act and highlight a few areas I think will create additional planning conversations as we move into the new decade.
So - What Changes?
Required Minimum Distribution (RMDs)
When money is contributed to a pre-tax account such as a 401k or an IRA, you receive tax benefits when you contribute. Those benefits come in the form of a lower taxable income (your income's reduced by the amount you contribute) and your money can grow tax-deferred until you decide to take it out. Eventually, however, the IRS would like to receive their taxes and you're forced to take money out through a Required Minimum Distribution (or RMD).
An RMD is a minimum amount you’re required to take out each year once you've reached a certain age and it changes yearly based on your age and account size. You can always take out additional money above the RMD amount, but you must distribute the required amount each year. If you don’t, you’ll be facing a 50% penalty on the amount you did not withdraw.
With the SECURE Act, RMD’s weren’t eliminated, but the starting age did increase from age 70 ½ to age 72, which provides a little extra time for tax-deferred growth.
Note: If you turned 70 ½ in 2019, unfortunately, you still fall under the old rules and must start your RMD’s in 2020.
STRETCH IRAs
Under the old rules, if you inherited a retirement account as a non-spouse beneficiary, you could elect to keep the money in that account and let it grow tax-deferred. If you chose that option, you were required to take an RMD out each year, but RMD’s could be "stretched" over your lifetime, resulting in smaller yearly distributions. As a non-spouse beneficiary, which is typically a younger individual, this was a great opportunity to let that account grow for future use while incurring minimal taxes each year from the required distribution.
With the SECURE Act, those rules changed quite dramatically. Now, as a non-spouse beneficiary, you must distribute the entire retirement account (IRA, 401k, Roth IRA, etc.) within 10 years of receiving that account. During those 10 years, you have flexibility on when to take distributions and how much those distributions are (i.e. could take a lump sum or take 10 yearly distributions), which creates an important planning opportunity for inherited retirement accounts. Additionally, if you've saved a large amount in pre-tax accounts, this may be a good time to review your beneficiaries and consider how those accounts will be passed on.
Note: The SECURE Act would NOT eliminate the stretch IRA for existing inherited IRAs for the current beneficiary.If the IRA owner is already deceased and there is an existing inherited IRA, the SECURE Act would not eliminate the stretch for the current beneficiary. Existing inherited IRAs would be grandfathered. The bill as currently written would make these provisions effective for inherited IRAs when the IRA owner dies after December 31, 2019. If the current beneficiary dies after December 31, 2019, the successor beneficiary would be subject to the new rules of the SECURE Act.
CONTRIBUTIONS & DISTRIBUTIONS
If you're charitably inclined in any way and may not need your RMD (or at least a portion of it), a Qualified Charitable Distribution (QCD) may be a strategy to utilize. With a Qualified Charitable Distribution, you can donate up to $100,000 per year ($200,000 for couples) directly from an IRA to a public charity and you can exclude the donated amount from your taxable income. With the SECURE Act, the age to begin utilizing QCDs remained unchanged (starts at age 70 ½).
The last two items to touch on before I close are the age limits for IRA contributions and 529 distributions. With IRA contributions, there is no longer an age limit for when contributions must stop while previously contributions were required to end at 70 ½. For 529 plans, student loan repayments up to a lifetime limit of $10,000 are now considered a “qualified expense”. As an added benefit, an additional $10,000 distribution is allowed for every 529 beneficiaries siblings.
As you can see, the SECURE Act brought about some interesting changes and in turn created new areas for unique planning conversations. If one of these topics or any of the other unmentioned changes from the Act creates questions for you, please reach out your Gilbert & Cook team. - Jarret Sheets, CFP®
Jarret Sheets, CFP®, Associate Advisor
Jarret joined our firm as an Associate Advisor in November 2019. In this role, he works with the Lead Advisor to help his clients and their families meet their financial goals.
Contact Jarret Sheets: jsheets@gilbertcook.com
