As part of a larger government spending package signed into law on December 20, 2019, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. While designed to increase government revenue, it also includes several provisions that may enhance the ability of individuals to save for retirement. This post addresses the provisions that are likely to be of most interest to friends and clients of Global View.
First, the Good News
Required Minimum Distributions (RMDs) now begin at age 72. Americans are working longer, and many of us do not need to take withdrawals from our IRAs at age 70-½ as was previously required. Now, RMDs begin at age 72.
- Action item: If you are turning 70-½ this year and had planned on taking a required distribution, you should consult with a financial advisor to review your withdrawal plans. (If you don’t currently have an advisor and are looking for a financial advisor in the Carolinas, contact Global View to see how we can help.) If you turned age 70-½ in 2019 or earlier and have already begun taking RMDs, you should continue to take them absent additional guidance from the IRS.
You can make IRA contributions beyond age 70-½. As we live longer, more of us are working past the traditional retirement age. Now, as a result of the SECURE Act, you can continue to contribute to your traditional IRA past age 70-½ as long as you are still working. This brings the rules for traditional IRAs more in line with those for 401(k) plans and Roth IRAs.
Part-time workers may be able to join their company’s 401(k) plan. Up until the passage of the SECURE Act, if you worked less than 1,000 hours per year, you were generally ineligible to participate in your company’s 401(k) plan. Except in the case of collectively bargained plans, the law now requires employers offering a 401(k) plan to allow participation by any employee who worked more than 1,000 hours in one year, or 500 hours over three consecutive years.
- Action item: If you work part-time and haven’t been eligible to participate in your company’s 401(k) plan, ask your employer or human resources department how and when you can enroll.
You can withdraw up to $5,000 per parent penalty-free from your retirement plan upon the birth or adoption of a child. The SECURE ACT authorizes an individual to take a “qualified birth or adoption distribution” of up to $5,000 from an applicable defined contribution plan, such as a 401(k) or an IRA, without penalty. The 10 percent early withdrawal penalty will not apply to these withdrawals, and you can repay them as a rollover contribution. Note that this provision would only be useful if you do not have sufficient personal savings to fully fund the birth or adoption of a child.
And Now for the Bad News
The lifetime “stretch” for inherited IRA distributions has been eliminated. Previously, if you inherited an IRA or 401(k), you could often “stretch” your distributions and tax payments out over your single life expectancy. Many people thus used “stretch” retirement accounts to provide themselves with steady income streams. Perhaps more importantly, many of us have planned to leave retirement accounts to children with the expectation that the recipients could stretch withdrawals over their lifetimes.
Now, for IRAs inherited from original owners who have passed away on or after Jan. 1, 2020, the new law requires most beneficiaries to withdraw assets from an inherited IRA or 401(k) plan within 10 years following the death of the account holder. (Exceptions to the 10-year rule include assets left to a surviving spouse, a minor child, a disabled or chronically ill beneficiary, and beneficiaries who are less than 10 years younger than the original IRA owner or 401(k) participant.) This is a major change in the way that inherited retirement accounts are taxed, and it may affect the way that your estate plan functions.
- Example: If you leave a $1 million IRA to your adult son, he was previously able to withdraw that account over his entire lifetime. Depending upon his age, withdrawals may have been stretched over 30 or 40 years. Now, the entire account will need to be withdrawn within 10 years of your death, meaning that your son must either add $100,000 per year to his gross income for 10 years; add $1 million to his gross income in the 10th year after your death; or come up with a withdrawal plan that falls somewhere in between the two prior options. Either way, you risk pushing your son up a bracket for income tax purposes and having more tax owed than you likely expected.
Many clients have estate plans that leave assets in trust for their children so as to protect the inheritance from their children’s creditors and/or divorcing spouses. Because of how these trusts are drafted, many of them will require by their terms that all of the retirement plan assets now be paid out from the trust to the children within 10 years of your death. If your retirement account assets constitute a significant portion of your personal wealth, this may undercut your estate plan by forcing assets out of the protected trust to your children in a much faster manner than was expected when the plan was executed. This can be true even if you just executed a trust-based estate plan in December 2019!
This is a major planning issue for clients with significant retirement accounts assets, especially if they are not currently married. Estate planning attorneys everywhere are now wrestling with how to deal with the impact this change in the tax law is having on the functioning of estate planning structures they have put in place for clients.
- Action item: If you have an estate plan that establishes continuing, or “lifetime,” trusts for your children or other beneficiaries, you should contact your attorney for a review.
- Action item: You should consider whether converting some of your traditional IRA to a Roth IRA might be advisable. You may be able to pay income tax at a lower effective rate now than your children will pay when they take withdrawals after your death.
While several provisions of the SECURE Act will be welcome news, many clients will need to review and update their estate planning in light of the elimination of “stretch” IRAs. As always, your Global View advisors are happy to help you understand and deal with changes in our laws that may affect your investing and/or estate planning.
If you have questions, contact us.