It became effective January 1, 2020. It is the first major retirement legislation since the passage of the Pension Protection Act in 2006.
Here’s what you need to know.
For 2020, the latest an RMD can be taken has been raised from age 70 ½ to 72. Those IRA owners turning 70 ½ in 2020 now will not have to take their RMD until age 72.
Retirees will now have more time to do a Roth conversion before RMD’s may push them into a higher tax bracket.
Age Limit Eliminated
The SECURE Act eliminates the age limit of 70 ½ for contributions to a traditional IRA. If you are still working you can now contribute to an IRA regardless of age. This now matches the rule for 401(k) plans and Roth’s.
“Stretch IRA” Disappears
Non-spouse beneficiaries of retirement plans like IRA’s and 401(k)’s were able to spread the RMD’s for these inherited accounts over their lifetimes. This helped non-spouse beneficiaries to keep their tax bracket from increasing.
The SECURE Act eliminates the “stretching” of distributions. Accounts must be depleted by the end of the tenth year following the year of death. There are no longer any RMD’s from beneficiary designated IRA’s. What matters is only the balance at the end of ten years following the year of death.
Any non-spousal beneficiary accounts set up in 2019 and prior are not affected.
There are exceptions to the new rule. These exceptions can still “stretch” the RMD’s over their life expectancy. They are surviving spouses, minor children, disabled persons, chronically ill individuals, and beneficiaries not more than ten years younger than the IRA owner.
The elimination of the stretch is a tax-revenue generator for the IRS. Rather than having to wait a lifetime to get all of the taxes, they will now get them in no more that ten years.
According to Ed Slott, CPA and PBS host, the IRA has now become a “lousy estate planning vehicle.” Slott also recommends that people who name a conduit trust as a beneficiary reexamine this strategy.
Slott goes on to suggest other options that now become more attractive than stretch IRA’s. For those that don’t need the money, cash value life insurance that pays out to a trust. “At today’s low tax rates, take withdrawals from the IRA, pay the tax and put it into a cash value life insurance policy that will pay off may multiples of the IRA value and be tax-free.”
Another option is a Roth conversion. Shift funds each year from the IRA into a Roth conversion. Today’s low tax rates are scheduled to sunset December 31, 2025 “to build a tax-free account you can leave to your beneficiaries.”
“That’s especially enticing given that heirs may be likely to face higher tax rates, especially if they are in high tax brackets” he adds.
Treatment of Fellowship and Stipend Payments
Taxable non-tuition fellowship and stipend payments are now treated as compensation thereby qualifying for IRA or Roth IRA contributions.
Previously, employers have been able to exclude part-time workers from participation in 401(k) plans. Now, if someone works at least 1,000 hours a year (about 20 hours a week) or three consecutive years of at least 500 hours, they will be able to participate in the 401(k) plan.
The new law gives employers liability protection for offering annuities in a retirement plan. This will give participants more choices and provide a choice for lifetime income. However, over the longer term by loosening the vetting requirements for insurance companies, participants will need to do their due diligence on the insurance company and the products offered.
Birth of a Child or Adoption
A maximum of $5,000 is allowed to be distributed penalty-free within one year of a child being born or adopted.
Overall, the SECURE Act is a step forward in helping people save for retirement but falls short in providing retirement security for the average American.
Karl Kim, CFP®, CLTC is the President of RPA Tax Group, LLC. His office is located in La Mirada. He can be reached at 714-994-0599 or at www.RetirementPlanningAdvisors.com. This is meant to be an educational article. Do not make any decisions solely on the information in this article. Consult your tax advisor, attorney or financial advisor before taking any action.