At the end of 2019, Congress passed the most sweeping change to retirement rules in over a decade called “Setting Every Community Up for Retirement Enhancement Act” (SECURE Act), this legislation went into effect on January 1, 2020, and impacts retirement and estate planning rules.
Here are the biggest takeaways from the Act:
Required Minimum Distributions (RMD) Start at Age 72
The rules delay the age at which you must begin taking your RMDs from your Traditional IRA.
If you are already taking them, continue doing so. The new rules do not affect you. If you were born between January 1 and June 30, 1949, you are subject to the old rules and must take your first RMDs before 2020-year-end. However, if you were born on July 1, 1949 or later, you can delay taking distributions until you turn age 72.
You Can Now Contribute to a Traditional IRA After Age 70½
If you are earning income, you can continue making contributions to your Traditional IRA after you retire if you wish. This change is great news for anyone who wants to continue working and growing their retirement savings for a rainy day. (There is no age cap for Roth IRA contributions, therefore, no change).
“Stretch” IRAs Are Gone As We knew Them (For Most People)
For beneficiaries of inherited IRAs after January 1, 2020, you are no longer able to “stretch” distribution payments over your own lifetime. Under the new rules, most beneficiaries of inherited IRAs must withdraw the full account balance and pay taxes on the distributions within 10 years. (Fortuitously, if you are presently enjoying an inherited IRA, you’re grandfathered in under the old rule and safe from this requirement).
Nevertheless, certain individuals will qualify for limited exemptions under the new law such as your surviving spouse, minor children, chronically ill or disabled beneficiaries and beneficiaries less than 10 years younger than the participant.
401(k)s May Start Including Annuities
The new law paves the way for employers to start offering annuities within 401(k) plans by adding additional “safe harbor” protection for employers.While annuities can add great cash flow options for some employees seeking retirement income, they’ll need to seek advice from a financial advisor before purchasing one within a 401(k). Be careful, as this is a potential trap that could have fees that are 3% or more if participating in an annuity in your plan. I have seen it recommended you should avoid the use of a tax-deferred investment inside a tax-deferred retirement plan. This could cost you and your employees thousands of dollars over the course of savings you have for retirement. BE CAREFUL!
401(k) Plans Become More Accessible to Businesses and Employees
Many small businesses find it expensive and burdensome to provide 401(k) plans to their employees.The new law makes it simpler and safer for small employers to team up to offer “multi-employer” plans. Beginning in 2021, employers who provide 401(k)s to full-time employees will be required to offer access to qualifying part-time employees. You’ll need specialist here as it gets complicated. BE CAREFUL!
New Parents Can Take Out Penalty-Free Distributions For Births and Adoptions
Now new parents can withdraw up to $5,000 (or $10,000 for married couples) from their qualified retirement accounts without an early withdrawal penalty if done within one year of the date of birth or adoption. (This withdrawal is subject to ordinary income tax)
Miscellaneous Tax Remedies
The medical expense deduction threshold is back at 7.5% of Adjusted Gross Income for 2019 and 2020.
529 college savings plans can now be used for apprenticeships and up to $10,000 of student loan repayments.
Children’s unearned income, traditionally taxed at a much higher trust tax rate, is now taxed at the parents’ top marginal tax rate.
The tax deduction for up to $4,000 in qualified tuition and fees is now available again.
Review/Amend Your Revocable Living Trust (RLT) or IRA Inheritance Trust (IRAIT)
Depending on the value of your retirement account, you may have directed the distribution of your accounts in your RLT, or you may have created an IRAIT that would handle your retirement accounts at your death. Your trust may have included a “conduit” provision, and, under the old law, the trustee would only distribute required minimum distributions (RMDs) to the trust beneficiaries. Basically, forcing the continued “stretch” based upon the beneficiary’s age and life expectancy. A conduit trust protected the account balance, and only RMDs–much smaller amounts–were to vulnerable income tax, creditors and divorcing spouses.
With the SECURE Act’s passage, a conduit trust provision is greatly limited because the trustee will be required to distribute the entire account balance to a beneficiary within ten years of your death. If we drafted the IRAIT for you there is an accumulation toggle provision integrated in your IRAIT. This was integrated there to provide your beneficiaries with solid asset protection from creditors and divorcing spouses. This still works as planned if implemented within the first 10 years following your death.
We should,however, discuss the benefits of an “accumulation trust,” an alternative trust structure through which the trustee can take any required distributions and continue to hold them in a protected trust for your beneficiaries. In any case when a distribution comes out to the trust it is subject to income tax, but with a pure “accumulation trust” it is about protecting your loved ones from their future decisions and their influencers.
Additional Trust Considerations
For most Americans, a retirement account is the largest asset they will own when they pass away. If we have not done so already, it may be beneficial to create a trust to handle your retirement accounts. While many accounts offer simple beneficiary designation forms that allow you to name an individual or charity to receive funds when you pass away, this form alone does not take into consideration your estate planning goals and the unique circumstances of your beneficiary. A trust is a great tool to address the mandatory ten-year withdrawal rule under the new Act, providing continued Asset protection of a beneficiary’s inheritance.
Review Intended Beneficiaries
With these changes to the law, now is a great time to review and confirm your retirement account planning including beneficiary designations. Whichever estate planning strategy is appropriate for you, it is important that your beneficiary designation meshes with that planning. If your intention is for the retirement account to go into a trust for a beneficiary, the trust must be properly named as the primary beneficiary. If you want the primary beneficiary to be an individual, he or she must be named. Ensure you have listed contingent beneficiaries as well.
If you have recently married or divorced, you will need to ensure the appropriate changes are made because at your death, in many cases, the plan administrator will distribute the account funds to the beneficiary listed, regardless of your relationship with the beneficiary or what your ultimate wishes might have been.
Bottom Line: Rules Change, but the Essentials of Planning Are Static
The SECURE Act offers opportunities to potentially maximize your planning yet is froth with new pitfalls to avoid. Be sure to work with someone who carefully analyzes how the rules could impact you and your retirement or estate planning needs.
In the meantime, if you have any questions, please give the office a call at (866) 696-1123 or hit “reply” to this email and I’m happy to help.