American flag waving with the Capitol Hill

The SECURE Act, or the Setting Every Community Up for Retirement Enhancement (SECURE) Act, was signed into law on Friday, December 20, 2019, attached to a year-end appropriations bill. While the changes may not be as wide-spread as the Tax Cut and Jobs Act (TCJA) of 2017, they do impact several financial planning decisions and require specific strategic planning. In this space, we share a summary of the main changes we’re focusing on at Yeske Buie that we believe will affect many of us:

  • Required Minimum Distributions (RMDs) Begin at 72
    • One of the biggest changes, at least in the headlines and with a direct impact on every single one of us saving to a retirement plan, is the change of the beginning date for annual RMDs from retirement accounts.
      • The prior required beginning date was the year you turn 70.5.
      • The new required beginning date is the year in which you turn 72. You can still choose to delay taking your first RMD until April of the following year, but this requires you to take two RMDs in that first year.
      • This means there will be no first-time RMDs for people turning 70.5 in 2020. Instead, they will take their first RMD in 2021 or 2022 (depending on when they turn 72).
        • This rule applies to anyone born after 6/30/1949 (anyone born on or before this date turned 70.5 in 2019 and is subject to the old rules).
      • Qualified Charitable Distributions (QCDs), which are tax-free distributions from an IRA to a qualified charity (and count towards RMDs) are still allowed once you have reached 70.5.
  • Some Inherited IRAs Must Now Be Distributed Within 10 Years
    • The next change with big potential implications and cause for strategic planning is the removal of the “stretch” of an inherited IRA. Previously, almost all beneficiaries of IRAs were allowed to “stretch” the Required Minimum Distributions (RMDs) beginning upon inheritance of an IRA over their full life expectancy.
      • There were exceptions to this, hence the “almost all”, especially for estates and some trusts.
    • Now, many beneficiaries will be required to distribute the full value of the account within 10 years (starting the year after inheritance). That being said, these beneficiaries will not be subject to annual RMDs – the only requirement is that all funds be distributed by the end of the tenth year after the death of the decedent (which means there is need for strategic planning around taxes and timing of distributions from inherited IRAs).
      • There are exceptions to this change that will allow certain beneficiaries inheriting IRAs after January 1, 2020 to fall under the old rules and stretch the distributions out over their life expectancies. The beneficiaries are called Eligible Designated Beneficiaries and they are:
        • Spouses
        • Individuals with chronic illnesses
        • Individuals with disabilities
        • Those not more than 10 years younger than the decedent
        • Minor children of the decedent
          • These children must be the children of the account holder (minor grandchildren will not qualify)
          • These children will be allowed to stretch the distributions out using their life expectancy until they reach the age of majority (18 in all but three states – AL (19), NE (19), MS (21)) at which time the 10-year clock starts ticking.
        • A couple notes:
          • The prior “5-year rule” will still apply to estates, charities, and some trusts (called “non-designated beneficiaries”) if the account owner died before their RMDs began. The distributions can still be stretched over the decedent’s life expectancy if the account owner was already taking RMDs.
          • These rules do not apply to governmental retirement plans (403(b), 457, TSP) until January 1, 2022.
          • We will be doing a full review of beneficiary designation information we have on file and will reach out to you if we believe an update is needed.
  • IRA Contributions Are Now Allowed After Age 70.5
    • Traditional IRA contributions are now allowed after age 70.5 as long as you have earned income.
  • 529 Funds Can Be Used to Pay Off $10,000 of Student Loan Debt
    • Distributions from a 529 plan to pay off student loan debt are now considered qualified higher education expenses and are not subject to tax or penalties.
      • The lifetime limit is $10,000 of debt repayment per person.
      • If this approach is used, the interest paid off using the 529 funds may not be deducted as student loan interest paid in that year.
  • The Kiddie Tax Has Reverted
    • The so called “Kiddie Tax” has reverted back to its pre-TCJA rules – a minor’s unearned income above a certain threshold will now again be taxed at the parents’ marginal tax rate (instead of trust tax rates which hit the maximum of 37% very quickly).This change is retroactive back to 2018.
      • If your child had significant unearned income in 2018 or 2019, consider reviewing their 2018 tax return with your tax preparer to see if it would be beneficial to amend the return (the new rules can be used if advantageous when filing the 2019 tax return).
  • And Much More
    • There are additional changes that apply in smaller or more specific situations and we’ll be sure to discuss them with you at our next meeting if we believe they apply to your situation. These items include or are related to:
      • 529s can be used for qualified apprenticeship programs
      • Qualified Birth or Adoption Distribution from IRA
      • Small business retirement plan credits
      • Maximum 401(k) contribution percentages
      • Fellowship and stipend payments
      • Foster care payments
      • Employer retirement plan adoption dates
      • Multiple Employer Plans

As noted above, we’ll be doing a full review of beneficiary designations on file and will reach out to you if we believe your beneficiary designations need to be revised or adjusted. We’ll continue to stay on top of your Required Minimum Distributions and we’ll be prepared to review options and strategies if you inherit an IRA or retirement plan.

As always, please reach out to us if you have any questions. We’re here to help you along your journey!