In the waning days of 2019, both the House and the Senate overwhelmingly passed the SECURE Act and President Trump signed it while flying somewhere on Air Force One (December 20, 2019). The new law’s name: Setting Every Community Up for Retirement Enhancement (SECURE) Act.
Effective 01/01/2020 there are 29 new provisions or changes to retirement that will affect retirees as well as a number of other Americans.
Here are six of the most important changes that you should know:
1) Required Minimum Distributions (RMDs) can be delayed to age 72 instead of age 70.5 under longstanding laws. However, if you turned age 70.5 in 2019, you will still have to take your RMDs as before.
If you don’t need to take withdrawals from your traditional IRA, 401K, TSP, etc. before you attain age 72, then this could be a benefit. It certainly will be easier for folks to figure out with no arcane rules about taking an RMD in the year you turn 70.5 (or you can wait until next April and take 2 RMDs that year – very confusing!).
The IRS has not yet published the new RMD tables with a starting age of 72 but I don’t expect them to be too different from the present tables. Although with growing life expectancies the RMDs will likely be lower than before.
Longtime readers of mine will know how I feel about “postponing” taxes with traditional IRAs/401Ks (as well as forced RMDs, little pre 59.5 access issues, perhaps causing Social Security to be taxed, etc.)
I truly believe that paying the tax today and using ROTHs and specially designed life insurance is a much better way to go if you think taxes will be higher in the future ($23+ TRILLION Federal Debt and some $126 TRILLION of total unfunded promises made to Americans (Social Security, Medicare, Medicaid, federal pensions, etc.)
The updated 2020 Edition of my “Get Me to ZERO” book is available on Amazon right now!! Get your updated copy for yourself or someone you care about.
2) The STRETCH IRA is gone (for traditional IRAs) – except for spouses who would simply roll over an inherited IRA to their own IRA. A non-spousal beneficiary used to be able to STRETCH the IRA by taking RMDs (based on their life expectancy) for the rest of their life. Now, they must empty (and pay income taxes) on the inherited IRA over no more than 10 years.
Besides the spouses’ exception, disabled beneficiaries and those who are not more than 10 years younger than the account holder (such as a slightly younger sibling, for example) are apparently exempt too. Minor children are also exempt, but only until they reach majority age. After that, they will have 10 years to withdraw the assets in an inherited account.
Current beneficiaries of inherited IRAs/401Ks and similar plans will still be allowed to withdraw the required minimum distributions over their life expectancy as before. The new law does not change your opportunity to stretch.
By eliminating the STRETCH, the IRS will collect it’s taxes quicker – especially on large IRAs.
Truth be told, most non-spousal beneficiaries take the money (and pay taxes) and RUN (spend it all). In my opinion, in many cases, that’s shortsighted thinking.
However, for large IRA balances, many well-to-do non-spousal beneficiaries (usually adult children) in their peak earning years, taking those IRA Distributions in 10 years or less will likely catapult them into the next highest tax bracket. That influx of taxable income (IRA) will probably cause not only the IRA distribution to be heavily taxed – but also their earned income!
Our group has a proprietary strategy and software to help the original IRA holder pay the future taxes for the spouse or non-spousal beneficiary on a DISCOUNTED basis for pennies on the tax dollar by using a small portion of the IRA (that is not needed for living expenses) now. Contact me if you’d like to learn more. Everyone involved will be happier – except the IRS!
3) Those folks over age 70.5 can now continue to contribute to a traditional IRA as long as they have EARNED INCOME. Under the old law, they could no longer contribute to an IRA (although they could to a 401K as long as they did not own 5% or more of the business). So even if you are 72 or older and taking RMDs, you now will still be able to contribute to your IRA.
By the way, did you know that you can contribute to a ROTH now matter how old you are? The catch is that you still need to have EARNED INCOME at least equal to the ROTH contribution.
4) The new law requires that all defined contributions plans (401K, 403B, TSP) deliver a lifetime income disclosure to participants at least once every 12 months. This lifetime income disclosure would essentially show how much income the lump sum balance in the retirement account could generate. The methodology for calculating lifetime income has not been nailed down yet.
Currently, 401(k) and similar plan statements provide an account balance, but that figure really doesn’t tell you how much money you can expect to receive each month once you retire.
So, the truth of this new disclosure is that people will get a much better picture of how much income their retirement plan balance will likely provide for them during a 20 or 30+ year retirement (30 years of unemployment!). They will likely be shocked to find out how little income even a $500,000 account balance will provide for them over time.
And this should be a great motivator to start better retirement planning and more saving. I can help!
5) The new SECURE Act also makes it easier for 401(k) plan sponsors to offer annuities and other “lifetime income” options to their plan participants by taking away some of the associated legal risks. These annuities will be portable as well from one plan to the next. So, if you leave your job you can rollover the 401(k) annuity you had with your former employer to another 401(k) or IRA and avoid surrender charges and fees.
6) New Planning Challenges For Trusts Named As Retirement Account Beneficiaries
It is always good practice for all beneficiary designations of retirement accounts to be periodically reviewed to see if they are still in line with, and best serve, the account owner’s wishes. However, the changes introduced by the SECURE Act will make it even more necessary to review any situations where trusts are named as retirement account beneficiaries.
In general, trusts created to serve as the beneficiary of a retirement account are drafted in such a manner as to comply with the “See-Through Trust” rules, which allow the trust to stretch distributions over the oldest applicable trust beneficiary. Broadly speaking, there are two types of such trusts; Conduit Trusts and Discretionary Trusts. Both types of trust could be unfavorably impacted by the SECURE Act.
There are a number of other provisions and changes that the SECURE Act makes, but these are the ones that will affect most of my clients and readers.
I hope you enjoyed this Blogpost and learned something about the new law.
HAPPY NEW YEAR… Mark