The SECURE Act: Retirement Planning Forever Changed?

Written by Chris Draughon

I want to see you achieve your financial goals so I spend my time making the complicated things simple. As the Director of Financial Planning I help our clients identify their most important financial goals and develop paths to get them there on time with room to spare.

January 22, 2020

By now you have likely heard that Congress passed, and the President signed into law sweeping changes to America’s retirement system as part of the 2020 Appropriations bill. The SECURE Act (Setting Every Community Up for Retirement Enhancement Act of 2019) has the potential to fundamentally change how wealth will transfer between generations among America’s affluent middle class. The major changes affect inherited IRA accounts, the starting age for required minimum distributions, and the repeal of the maximum age for making IRA contributions. There are a few other provisions that allow for early, penalty free withdrawals from retirement accounts and even a change to 529 college savings plans that allows for payments to student loans. Since many of our clients will be impacted by the retirement provisions, we’ll focus on these items.

Stretching IRA inheritances is all but dead

If you were planning to leave your retirement accounts to your heirs, they will generally no longer be able to stretch the distributions over their lifetime and will be required to distribute the accounts within ten years. This will significantly reduce the maximum generational value of retirement plans. Notably, the Act does not apply to the following: your surviving spouse; disabled beneficiaries; chronically ill beneficiaries; individuals who are not more than 10 years younger than the decedent; certain minor children of the original account owner; and those who have already inherited a retirement account.
Going forward, beneficiaries who inherit a retirement account in 2020 will have 10 years to empty the account. This applies to retirement plans, traditional IRAs and Roth IRAs. Beneficiaries will have some choice as to the timing of distributions. They can take distributions annually, sporadically, or wait until the end of the tenth year. It’s going to be more important to consider the beneficiaries tax bracket going forward and may make Roth Conversions more compelling if one of your goals is to maximize the wealth your beneficiaries inherit.
If you’ve named a trust as beneficiary of your retirement account, we should talk. While the SECURE Act does not explicitly address “trust as beneficiary” situations, it is likely the IRS guidance will continue to view their pass-through provisions as needing to adhere to the new rules. Many trusts designate that retirement accounts should be distributed in accordance with the stretch provisions. This worked correctly when we could stretch over a lifetime, but now it might be a tax bomb where distributions would only be allowed in the 10th year when a full distribution of the value is allowed! We’ll want to work with your attorney to review the terms of your trust to make sure this does not happen.

RMDs don’t start until age 72

Effective January 1st, 2020, Required Minimum Distributions from retirement accounts will now begin at age 72 rather than age 70 and ½. If you are already taking RMDs or attained the age of 70 and ½ this year, you are still required to take RMDs.
Qualified Charitable Donations from retirement accounts continue to have a 70 and ½ start age. If you’ve reached this age and are charitably inclined, we should discuss the merits of this tax / giving opportunity in light of today’s high standard deductions where you’re likely not getting to itemize anymore.
Unrelated to the SECURE Act but worth noting, beginning in 2021 the IRS is changing its life expectancy tables for calculating RMDs. The percentages used for calculating distributions are set to reduce slightly thereby resulting in slightly smaller RMDs. Not a big impact, but a positive one none the less.

The maximum age for contributing to traditional IRAs is repealed

For those over the age of 70 and ½ with earned income – generally from employment – you can now contribute to a traditional IRA. Whether it makes sense to do so remains to be seen. If you find yourself in this position, we should discuss the tax and inheritance impacts before making contributions.

Kiddie tax sees changes too

While not directly related to the SECURE Act, another part of the Appropriations bill repealed the changes to the Kiddie tax that where implemented under the 2018 Tax Cuts and Jobs Act. The Kiddie tax Is basically a tax on unearned income for a child under age 18, or under 24 if they are a full-time student. Going forward, earnings will be taxed at their parent’s marginal tax bracket rather than trust tax rates. This is a good thing but depending on their parent’s tax bracket could still be viewed as punitive. Another area we’ll want to discuss with you if you’re designating minor children as beneficiaries of your retirement accounts.
As is often the case when Congress names legislation, the actual implications are often the exact opposite of the title. In some ways the SECURE Act makes inheriting your wealth less secure. One thing is certain though. We’ll be spending next year reviewing your beneficiary designations. If you have questions about the SECURE Act and how it will impact your plans, let us know. And please let those you care about know this information too.