2019 brought the second major piece of Congressional action in the past 24 months with passing of the SECURE Act (Setting Every Community Up for Retirement Enhancement). Although not nearly as sweeping as the Tax Cuts and Jobs Act of 2017, the Secure Act of 2019 creates several updates to the rules around retirement plans in an effort to address the so-called retirement crisis. As with most regulation, what regulation gives in one hand, regulation takes away with the other. Here are few of the key changes that may impact you most:
Required Minimum Distributions (RMD’s) Pushed Back to Age 72
If you are only planning to take RMD’s to satisfy the IRS, this change is most welcome. Mirroring current law, individuals reaching age 72 will still be able to delay their first RMD until April 1 of the year following the year for which they must take their first RMD. The new required beginning date will begin at age 72, but it only applies to those individuals who turn 70 ½ in 2020 or later. So even if you turn 70 ½ on December 31st, 2019 will not yet be 72 in 2020, you will still be required to continue RMDs under the existing rules, and to take an RMD for 2020 (and each year thereafter).
The Stretch IRA Loses Elasticity
The most deeply impactful change is the elimination of the so-called “stretch” provision for most (but not all) non-spouse beneficiaries of retirement accounts. For retirement account owners who pass away in 2020 and beyond, beneficiaries will have only 10 years to completely liquidate the account. Currently, beneficiaries can stretch the distributions over their life expectancy, potentially reducing the tax bite. Beneficiary’s will have some flexibility with respect to the timing of the distributions, however certain types of trusts named as retirement account beneficiaries may find they’re no longer able to make annual distributions under the new rules, which could force the entire account to be liquidated all at the end of the ten year period. This change has substantial tax implications for unsuspecting inheritors.
Qualified Charitable Distributions (QCD’s) Still Allowed at 70 ½
The SECURE Act makes no changes to the date at which you may begin to use IRAs (and inherited IRAs) to make QCDs. While an individual turning 70 ½ in 2020 will not have to take an RMD for 2020, they may still use their IRA to make a QCD of up to $100,000 for the year (after actually turning 70 ½ or later). Beginning in the year an individual turns 72, any amounts given to charity via a QCD will reduce the then-necessary RMD as well.
Restriction Lifted on Traditional IRA Contributions After Age 70 ½
Good news for people working past 70 ½ or have a spouse earning income as you will be able to fund a Traditional IRA (Spousal IRA) as long as you have earned income.
Beyond age-based changes, the SECURE ACT introduces “Qualified Education Loan Repayments” as a qualified education expense. This means distributions from 529 College Savings Plans may be used to pay principal and interest of qualified education loans, limited to a lifetime amount of $10,000 per beneficiary, but includes an additional $10,000 for loan repayment for each plan beneficiary’s siblings. Also, families who adopt or have newborn children to take up to $5,000 from their retirement plan without the usual 10% early distribution penalty.
Back on the tax front, kiddie-tax reverts to pre-tax cuts and jobs act rules. Once again, any income subject to Kiddie tax is taxable at the child’s parents marginal tax rate. The change is effective for 2020, however taxpayers can elect to apply the old rules to the 2019 tax year, and back to 2018 as well. So, for individuals who have children that had substantial unearned income in 2019, you can simply choose the new rules unless the ‘old’ rules at trust tax rates are more favorable. If the same holds true for 2018, people can consult their tax advisor to evaluate the potential tax savings that could be achieved by amending your 2018 tax return.
For employers, the tax credit for small business to set up a new retirement plan increases from $500 to $5,000, and creates a Fiduciary Safe Harbor for annuities to be included in retirement plans to allow plan participants to see how much guaranteed income would be generated from their current retirement plan balance.
In all, the Secure Act has 29 provisions or major changes. The GBB team will be busy in the months ahead as we re-evaluate plans for clients impacted by the legislation. In the meantime, if you have questions, please give us a call at (916) 924-7527.