The SECURE Act: Simple Ideas for Your Planning

Setting Every Community Up For Retirement Enhancement (SECURE) Act was recently signed into law by President Trump in December and offers a meaningful impact for retirement legislation. A more extensive overview of the law’s provisions can be found here, but for purposes of this post (and subsequent ones), I want to focus on a few key planning ideas that you can incorporate into your personal financial plan.

Let’s start with a simple one – the change to the age that Required Minimum Distributions must begin. If you were born on July 1, 1949 or later, your RMD age is now age 72 instead of the previous age 70 ½.  That’s important for several reasons, none more important than the fact that your retirement account can continue compounding in a tax-deferred manner for an additional 18 months before the IRS requires you to begin taking income. If you turned 70 ½ before the end of 2019, you still must begin your RMD’s, even if you were delaying your first RMD until April 1, 2020.

Planning Idea: Consider using those extra tax years to convert more of your pre-tax IRA to a Roth IRA which has no future Required Minimum Distributions and removes future earnings from being taxable.

Notably, Qualified Charitable Distributions (QCD’s) are still permitted at age 70 ½ which is great news for several reasons. First, this is probably one of the most tax-effective ways to give to charity, especially if you do not itemize your tax deductions on Schedule A. Second, each Qualified Charitable Distribution reduces your future Required Minimum Distribution. It should be noted a nerdy advisor might say “each QCD reduces your future RMD” because if you use a bunch of acronyms, you must be really smart.

Planning Idea: Consider making QCDs in these extra years to further reduce your future RMDs.

Maybe the most impactful piece of this reform is the change to Inherited IRA rules. If you inherit an IRA from the original IRA owner and they passed away prior to January 1, 2020, there are no changes to the old rules and you can likely stretch your IRA distributions over your remaining life expectancy. However, if the original IRA account owner passes away after December 31, 2019, most beneficiaries will need to withdraw all assets from the Inherited IRA within 10 years following the death of the original account holder! There is one small piece of good news – there are no distribution requirements technically until that 10^th year, however, the entire balance needs distributed by that 10^th year. Also it should be noted that spousal beneficiaries can rollover the IRA to their own and subject that money to their own Required Minimum Distribution rules (i.e. the 10-year rule does not apply). Let’s consider the impact for a non-spouse beneficiary:

If you are 40 years old and inherit an IRA under the old law, you could stretch your withdrawals over your 43.6 year life expectancy. Under the new rules, you only have 10 years to withdraw the balance.  For a 40 year old who is entering their peak earning years, these RMD’s are going to add a considerable chunk of income to their tax return. What does this mean for you? For starters, you can no longer ignore large retirement account balances that you may not need to spend down during your own retirement and assume your next generation will just stretch the IRA distributions, thus beating Uncle Sam over the head with your beneficial compound interest hammer.

Planning Ideas: The following could be effective individually, or in some combination.

• The original account owner could complete lifetime Roth Conversions while possibly in a lower tax bracket than the future beneficiary, thus lowering the multi-generational tax burden.
• Lifetime, or post-death gifts to charity could be made from the qualified accounts.
• Consider splitting the retirement assets among a larger number of beneficiaries, possibly including grandchildren, allowing you to spread the tax bill into several lower tax brackets possibly.

Other updates from the Act worth noting:

• You are now permitted to make Traditional (deductible) IRA contributions past age 70 ½ if you still have earned income. Beyond the scope of this post are some anti-abuse rules that coordinate post 70 ½ deductible Traditional IRA contributions and Qualified Charitable Distributions.
• Individuals are now allowed up to $5,000 to be distributed penalty-free from an IRA or retirement plan for a Qualified Birth or Adoption Distribution and early interpretation suggests this is per-child and both parents could make this distribution at up to $5,000 each. Please note the distribution can only be made at any point during the one-year period beginning on either the date of birth, or the date on which the adoption of an individual under the age of 18 is finalized.
• Distributions for Qualified Education Loan Repayments can now be made from a 529 Plan up to $10,000. This is a per child limit.
• The following tax extenders were put in place and are effective only through 2020:
  • The discharge of certain qualified principal residence indebtedness is excluded from gross income;
  • Mortgage insurance premiums are deductible on Schedule A;
  • The deduction for qualified tuition and related expenses; and
  • The medical expense deduction on Schedule A is available for expenses that exceed 7.5% of AGI for 2019 and 2020, lowered from the previously instated rule of 10% of AGI.

The bill appeared to be dead in Congress earlier this year – it’s amazing how motivating passage becomes when a $1.4 trillion spending package is in play! Unfortunately, it’s probably that simple.

Jamie