In late 2019, the first substantial legislation related to retirement savings since 2006 became law. The Setting Every Community Up for Retirement Enhancement (SECURE) Act brings numerous changes to the retirement and estate planning landscape, and some of them should prompt careful review of your existing plans to ensure they’ll accomplish the desired outcomes, including minimizing taxes.
Below we outline some of the most significant provisions found in SECURE:
Prior to the SECURE Act, you couldn’t contribute to traditional IRAs starting in the year for which you reach age 70½, even if you continued to work. The new law eliminates that restriction, instead allowing anyone with earned income to contribute. This change brings the rules for traditional IRAs in line with those for 401(k) plans and Roth IRAs.
The longer period to contribute takes effect for contributions for the 2020 tax year. While contributions for 2019 can be made as late as April 15, 2020, those contributions are permitted only for individuals under the age of 70½ as of the end of 2019.
The SECURE Act eases the rules for required minimum distributions (RMDs) from traditional IRAs and other qualified plans. It generally raises the age at which you must begin to take RMDs — and pay taxes on them — from age 70½ to 72. This new rule, however, applies only to individuals who hadn’t reached the age of 70½ as of the end of 2019.
Some taxpayers have turned to qualified charitable distributions (QCDs) as a tool for satisfying both their RMD requirements and their charitable inclinations. QCDs may be an attractive option because the Tax Cuts and Jobs Act (TCJA) has led more taxpayers to claim the standard deduction on their taxes, losing out on the federal tax benefits previously enjoyed by virtue of charitable contributions. With a QCD, you can distribute up to $100,000 per year directly to a 501(c)(3) charity once you reach age 70½, even if your RMD age is now 72. You don’t receive a charitable deduction, but the distribution is excluded from your taxable income.
One wrinkle to note is that the aggregate amount of deductible IRA contributions made under the new rule extending the age for which deductible IRA contributions may be made (that is, those for years in which you’ve reached age 70½ and beyond) will reduce your QCD allowance going forward. This is the case only if those deductible IRA contributions haven’t already been used to reduce your QCD and aren’t below zero. Perhaps an oversimplified way of looking at it is that any deductible IRA contributions allowed because of the new rules will reduce what would otherwise be allowed as a QCD.
For example, suppose that at ages 71 and 72 you made deductible IRA contributions that, in total, equal $10,000. Then, at age 73, you make a QCD of $50,000. The QCD is limited to $40,000 ($50,000 less $10,000). Thus, $10,000 of your distribution is taxable. Note, however, that because $10,000 went to charity you’ll be eligible to claim that amount as an itemized deduction.
Perhaps more important for some estate plans, the SECURE Act eliminates so-called “stretch” RMD provisions that have allowed the beneficiaries of inherited defined contribution accounts to spread the distributions over their life expectancies. Younger beneficiaries could use the provision to take smaller distributions and defer taxes while the accounts grew.
Under the SECURE Act, most non-spouse beneficiaries must withdraw the entire balance of an account within 10 years of the owner’s death, albeit not according to any set schedule; they can wait and withdraw the entire amount at the end of 10 years if they wish.
Be aware that the new rules apply only to those inheriting from someone who died after 2019. Thus, if you inherited an IRA years ago you won’t be subject to the new rules with respect to your RMDs. However, when your beneficiaries inherit the IRA from you, they’ll be subject to the new rules.
Read more on the stretch provision in “7 Key Tenets of the SECURE Act — Including the Elimination of the Stretch IRA”
The SECURE Act creates a new exemption from the 10% tax penalty on early withdrawals from defined contribution plans for qualified births or adoptions. You can withdraw an aggregate of $5,000 from a plan without penalty within one year of the birth of a child or an adoption of a minor or an individual physically or mentally incapable of self-support.
Couples in which both parents have separate retirement plans can withdraw an aggregate of $10,000 penalty-free. (Eligible adoptees do not include the child of your spouse.) Such withdrawals are subject to ordinary income tax.
Under the SECURE Act, you can use 529 plans to pay as much as $10,000 of principal and interest on qualified education loans for a plan beneficiary. The law also permits plan distributions, subject to the same limit, to pay off qualified student loan debt for the beneficiary’s siblings.
529 plans are expanded to include registered apprenticeship programs, too. Distributions can be made to such programs for costs related to fees, books, supplies and equipment necessary for program participation.
The TCJA changed the kiddie tax rules, generally making unearned income generated by children over a certain threshold taxable at the tax rates for trusts and estates, rather than the generally lower rates of their parents. The SECURE Act reverses course, so a child’s unearned income will return to being taxed at the parents’ highest marginal rate.
The law provides the option to calculate the kiddie tax for 2019 under the TCJA or SECURE Act rules. You can also amend your 2018 tax returns to apply the new rule if financially worthwhile.
With most of the SECURE Act’s provisions already in effect, start planning with your advisors now to begin making the necessary adjustments to satisfy your long-term objectives.
Read “8 Areas the SECURE Act Changed for Employers with Retirement Plans”
Cohen & Company and Sequoia Financial Group have prepared a guide specifically addressing the elimination of the stretch qualified plan/IRA. Download the full guide, which includes a helpful checklist and case studies, or the one-page summary. Find additional retirement resources at goodiraideas.com.
Contact Scott Swain at email@example.com or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.
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