Six Key Retirement Changes of the Secure Act
By: Carol Schmidlin
The Setting Every Community Up for Retirement (SECURE) Enhancement Act was signed into law by President Trump on December 20, 2019. This is the most extensive retirement act since the Pension Protection Act of 2006.
Here are the six notable key retirement changes that are effective January 1, 2020:
- Eliminates the age limit for making traditional IRA contributions. Under the old law, IRA contributions could no longer be made starting the year an individual turned age 70 ½.
- Back-Door Roth IRA benefit – This is a way for people with income that is too high to qualify for a Roth IRA contribution – to contribute to an IRA and then convert IRA to a Roth IRA. Prior to this law change, the year an IRA owner turned age 70 ½, they were not eligible to contribute to an IRA. Beginning January 1, 2020 people over age 70 ½ with income too high to qualify for a Roth IRA contribution can now contribute to an IRA, and then convert to a Roth IRA.
- Expands the ability to do a spousal IRA contribution (for a non-working spouse) for spouses who are over age 70 ½, doubling the contribution for a couple.
- While the age limit for making traditional IRA contributions is eliminated, earned income is still required to make an IRA, Roth IRA or spousal IRA contribution.
- IRAs are prorated to determine the taxable amount of the conversion. Example: John is 71 and wants to take advantage of the Back-Door Roth IRA. He contributes $7,000 to an IRA and then converts it to a new Roth IRA. Meanwhile, John has $500,000 in a pre-tax IRA. The pro-rata rules apply, so John’s IRA balance is $507,000 ($500,000 + $7,000 = $507,000), making 1.4% of the $7,000 conversion tax-free and 98.6% taxable.
- Increases the RMD age from age 70 ½ to age 72 for all retirement accounts subject to Required Minimum Distributions (RMDs). This applies to individuals that have not attained age 70 ½ by December 31, 2019.
- Allows more time to do Roth conversions before RMDs begin. This can be very compelling for those who want to shift some of their taxable assets to tax-advantaged assets.
- For Americans living longer, this may help their savings last throughout their retirement years. “A theoretical $500,000 portfolio, earning 5 percent annually, would have $33,500 more at age 89 if the RMDs started at age 72,” CNBC reported.
- This provision does not change the age at which an individual can make a Qualified Charitable Distribution (QCD) from their IRA, which remains at age 70 ½. This creates a 1-2 year window where IRA distributions may qualify as charitable distribution, but not as RMDs, therefore reducing your income by the amount of your donation up to $100,000 per year.
- Participants no longer employed by the federal government will continue to be required to take RMDs from a Roth TSP. RMDs are not required from Roth individual retirement accounts (IRAs), which may be an incentive for some older plan participants to roll over Roth 401(k) funds into a Roth IRA.
- Once RMDs begin, those RMDs cannot be converted to a Roth IRA.
- Allows penalty-free withdrawals for birth or adoption, but the distribution is still taxable. Under the old law, there was no exception from the 10% early withdrawal if under age 59 ½.
- This exception applies to any distribution from the retirement account within one year from the date of birth or adoption.
- Repayments to the plan are allowed and can be repaid (re-contributed back to the retirement account). The repayment will be treated as an eligible rollover.
- The limit is $5,000 lifetime distribution, not per year.
- Applies only to children age 18, or physically or mentally disabled and incapable of self-support
- My personal note is that retirement accounts should be used for your retirement and should only be touched as a last resort for any use, except for your retirement.
- Eliminates the “Stretch IRA” by mandating inherited IRAs, for non-spouse beneficiaries, be withdrawn and taxes paid within 10 years. Exceptions are made for (1) surviving spouse, (2) minor children (not grandchildren) up to age of majority or age 26 if student, (3) disabled individuals, subject to IRS tax code, and (4) chronically ill, based on the tax rules for Long-Term Care Services, and beneficiaries not more than 10 years younger than the IRA owner, for example a sibling close in age will be able to stretch the IRA.
- This provision is not retroactive, so will not affect those who have inherited an IRA in 2019 or prior years. It applies to those who inherit on January 1, 2020 and after.
- There are many people that name a trust the beneficiary of their retirement accounts. As long as the trust qualifies as a “see through trust,” the inherited IRA could be stretched over the oldest beneficiary’s lifetime, possibly for decades. The SECURE Act no longer allows that since the only minimum distribution is the end of tenth year – 100% of the account would come out and be taxed at that point. All inherited funds would be release to the beneficiaries, abolishing what the account owner wanted.
Critical Action Item:
- If you have named a trust as your retirement account (IRA, 401k, etc.) as your beneficiary, you should review immediately and probably revise the trust or get rid of it altogether.
- Encourages employer-based plans to offer annuities in their plan by providing liability protection for offering annuities. The provision provides a safe harbor for employer liability protection. The employer is still required to do due diligence as a fiduciary when selecting the insurance company and the annuity option. The employer is not required to select the lowest cost contract.
- There are many annuities that offer lifetime benefits and still allow you the flexibility to take additional withdrawals if needed, as well as pass any remaining balance to your loved ones.
- Allows Taxable non-tuition fellowship and stipend payments to be treated as compensation to qualify for an IRA or Roth IRA contribution.
There is a lot of information to understand and planning opportunities to consider.
Here are 5 Solutions and Opportunities to Consider:
- Re-Evaluate Beneficiaries
- Spousal rollovers can be more valuable for tax deferral
- If you listed a trust as a beneficiary, review immediately
- Tax Bracket Management
- Maximize low tax brackets
- Qualified Charitable Distributions if you are charity inclined
- Examine Roth Conversions
- Current lower rates under the Tax Cuts and Jobs Act are scheduled to sunset after 2025
- Is paying the tax worth it if the Roth can only last for 10 years after death?
- Life Insurance as an estate and tax planning vehicle
- Can replace all the benefits of a stretch IRA and IRA trusts
- Less tax for beneficiaries
- Avoid Trust Tax Rates by All Means
- Highest trust tax rate at present is 37% for income over $12,950
Securities offered through J.W. Cole Financial, Inc. (JWC) Member FINRA/SIPC
Advisory services offered through J.W. Cole Advisors, Inc. (JWCA)
Franklin Planning and JWC/JWCA are unaffiliated firms.
Franklin Planning takes no responsibility for the current accuracy of this information