A bipartisan retirement bill, called the SECURE ACT (an acronym that stands for The Setting Every Community Up for Retirement Enhancement Act) was included in a larger legislative package passed on December 19, 2019. The SECURE ACT is one of the most significant pieces of retirement plan legislation in over a decade. Most provisions in the law became effective January 1, 2020. Open Multiple Employer Plan (MEP) provisions will be effective January 1, 2021. Below are some of the highlights that we wanted to bring to your attention. We are always happy to discuss and try to help you better navigate financial planning matters such as these. Please reach out with any questions.
Key Provisions of the Secure Act
Required Minimum Distributions
- For individuals turning 70½ after 1/1/2020, the new RMD beginning age will be 72 (This rule also applies to Qualified Deferred Variable and Fixed Annuities).
- For individuals that were 70½ as of 12/31/2019, they will continue to take RMDs as usual.
- The IRS may provide further guidance on this point so those who reached age 70½ in 2019 may want to speak with their tax advisor about their 2020 distribution approach.
The “Stretch IRA” (Inherited IRAs)
- Named for instances where an account owner names a much younger beneficiary who can stretch distributions over their lifetime.
- For situations where the original IRA account owner passes away after December 31, 2019, fewer beneficiaries will be able to extend distributions from the inherited IRA over their lifetime.
- Under the new law, as of 2020, IRA beneficiaries will have 10 years to spend down the inherited IRA (with some exceptions) after the death of the original account holder.
- Exceptions to this rule include assets left to a surviving spouse, a minor child, a disabled or chronically ill individual, and beneficiaries who are less than 10 years younger than the decedent. For anyone who inherited an IRA from an original IRA owner who passed away prior to January 1, 2020, no changes to your current distribution schedule are required.
- This change will require some investors to reevaluate their retirement and/or estate planning strategies.
- Under previous law, once an individual became subject to RMDs (age 70½), they could no longer contribute to an IRA......under the SECURE Act, the age limit for IRA contributions no longer applies.
- Keep in mind that an individual must still have earned income (not portfolio income) as a basis to be eligible for such IRA contributions.
Qualified Charitable Distributions (QCDs)
- Taxpayers over age 70½ can donate up to $100k per year from an IRA to qualified public charities; the distribution neither counts as income nor as a charitable deduction (yet it counts towards satisfying an RMD).
- There had been some question with the RMD age shifting to 72 whether this would shift the earliest age to start QCDs from 70½ to 72.
- From financial planning expert Michael Kitces, “the SECURE Act does not change the age at which an individual can make a Qualified Charitable Distribution from their IRA, which remains at age 70½ and now creates a unique 1- or 2-year window where IRA distributions may qualify as charitable contributions, but not as RMDs (that haven’t yet begun).”
- The law expands the definition of a tax-free or qualified distribution from a 529 savings plan to include repayment of up to $10,000 in qualified student loans, and expenses for certain apprenticeship programs.
- The SECURE Act makes this change retroactive to distributions made after December 31, 2018.
Penalty-Free Distributions for Birth or Adoption of a Child
- Upon the birth or adoption of a child, the law permits an individual to take a "qualified birth or adoption distribution" of up to $5,000 from an applicable eligible defined contribution plan or IRA. This distribution is not subject to the 10% early withdrawal penalty.