On December 20, 2019, a $1.4 trillion spending package was signed into law that unbeknownst to many outside the financial industry, included a game changing piece of legislation that impacted your retirement accounts. The Setting Every Community Up for Retirement Enhancement Act or ‘SECURE Act’ for short, made some dramatic changes to your retirement that you should be aware of and plan for.
Required Minimum Distribution age increased to 72 A major change to retirement accounts is the increase of the minimum distribution age of 70½ to 72. Required minimum distributions (RMD) are mandatory to take from your retirement accounts each year, irrespective of whether you want or need the money. Under the new law, no longer do you have to begin this process at age 70½ and can now wait until age 72 to withdraw money from your retirement accounts. Additionally, this indirectly allows for longer tax deferment of your retirement accounts by a year and half. A win-win in our opinion. The biggest question we’ve received is what if I am already 70½ but not yet 72? Can I stop taking my RMD until age 72? Unfortunately, the answer is a loud and clear "NO". The law clearly states that the new legislation is effective 1/1/2020. If you took an RMD in 2019, you will need to continue in 2020 and beyond. With the increase in age to 72, this extends additional planning opportunities such as Roth conversions and income withdrawal strategies in retirement and you should certainly look at you own personal situation to determine if changes to your financial strategy are warranted.
Stretch IRAs are eliminated for non-spousal beneficiaries When a person passes away with an IRA or other retirement account, the account is distributed to the beneficiaries named on the account. With an Inherited IRA, the beneficiary is required to withdraw money from the account the year following death, irrespective of the beneficiary’s age. One of the most utilized strategies was to “stretch” the inherited IRA distributions over the lifetime of the beneficiary. This would create a smaller required distribution for the beneficiary because it was based on their lifetime, not the decedents. Under the SECURE Act, this “stretch” feature is no longer available to utilize and the law has now set a 10-year time limit on inherited IRA accounts. In other words, the inherited account value must be completely withdrawn at the end of 10 years! If you are a spouse, do not fear because you are still allowed to use your life expectancy. The elimination of the stretch IRA is a huge change for the management, planning, and distribution of inherited IRA accounts. And it changes how you should think about your heirs and your estate plan.
Qualified Charitable Distributions remain available to those age 70½ So you thought that you could forget about the age of 70½? Well thankfully, you thought wrong. Over the past two years, utilizing retirement accounts for philanthropic goals has provided a great advantage to many. By gifting directly from an IRA, you are able to satisfy a portion of your required minimum distribution, provide a philanthropic gift, and also reduce your taxable income. It was truly a trifecta from a tax and planning stand point. The caveat being that you must be 70½ to implement the strategy. With the increase of the Required Minimum Distribution to 72, it was feared that this strategy would also be delayed to age 72, but we can all rest assured. The SECURE Act kept language indicating that Qualified Charitable Distributions (QCD) can still be utilized once an individual turns age 70½.
Other Noteworthy Items:
- The AGI hurdle for itemized medical deductions was extended to remain at 7.5% of adjusted gross income until year 2021. For tax years 2019 and 2020, it was set to increase to 10%. If you have ongoing medical expenses, long-term care insurance premiums, etc. it would be worth providing your tax professional with your medical expenses for the year.
- Student loans can be paid from college 529 accounts (up to a $10,000 lifetime max). This could serve as a planning opportunity for grandparents with a 529 account benefiting their grandchild. Rather than pay the tuition during the grandchild’s schooling and jeopardize financial aid availability, taking a student loan and paying it off post-graduation may be an option.
- 529 accounts can now be used for apprenticeship programs. For parents and grandparents, determining the trajectory of a child’s future is a best guess. Under the new law, those accounts can be used to pay for the expenses and certification requirements of apprenticeship programs.
As you can see, there are some major changes to the financial landscape by way of the SECURE Act. Now is the time for you to take action and make sure you are leveraging the most out of the new rules.