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What The SECURE Act May Mean For You Individually

The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) was signed into law on December 20, 2019, with significant changes to IRA, Roth IRA and qualified retirement plan contributions and distributions. While some changes are favorable, others definitely are not. With provisions being effective at the beginning of this year or retroactively to 2019, now is the time to consider how these new rules may affect your situation.

Repeal of maximum age for traditional IRA contributions. Unlike Roth IRAs, traditional IRA owners haven’t been able to contribute past age 70.5, even if they were still working. Under the new law, traditional IRA owners can now make contributions past age 70.5, if they or their spouse have earned income.

Additional payments considered compensation for retirement contributions. Graduate and post-doctoral student’s taxable non-tuition fellowship and stipend payments now count as earned income for purposes of making IRA contributions. Tax-exempt difficulty-of-care payments count as compensation for making retirement contributions.

Age increased for required minimum distributions. Under prior law, you had to start taking required minimum distributions (RMDs) from your traditional IRA when you turned age 70.5. The same rule applies to retirement plans if you’re 5% or more owner, even if you are still working. Under the new law, if you turn age 70.5 in 2020 or later, your RMDs from certain plans don’t start until age 72. You still have until April 1 of the following year to take your first RMD. The old rules still apply to those who turned age 70.5 prior to 2020. If you are less than a 5% owner of the company, haven’t retired, and the employer plan allows you to delay RMDs, you don’t need to start RMDs until you retire.

Qualified Charitable Distribution (QCD). Age 70.5 still applies to QCDs from your IRA or certain inherited IRAs. If you are age 70.5 or older, you can make QCDs of up to $100,000 per year directly from your IRA to charity and not have to include the distribution in taxable income. You don’t have to wait until age 72. Caveat – there is an adjustment to the QCD for any postage 70.5 IRA contributions.

Inherited retirement accounts. For those who inherited IRAs, Roth IRAs, and qualified retirement plans before 2020, distributions are taken over the life expectancy of the designated beneficiary if that’s an individual or a qualified trust. If children or grandchildren inherited a retirement account, they are able to stretch those RMDs over their long life expectancies.

The new law severely shortens the stretch for these accounts. For deaths of account owners after 2019, beneficiaries must fully distribute the inherited account by the end of the 10th calendar year following the account owner’s death. This accelerates the income tax to individuals or certain trusts named as beneficiaries. It also accelerates how fast the cash comes out to beneficiaries, perhaps faster than desired. This accelerated distribution period has a significant income tax and financial implications that urgently need attention and careful planning.

This new rule doesn’t apply to certain designated beneficiaries (now called eligible designated beneficiaries), including 1) the spouse, 2) a minor child, 3) a disabled or chronically-ill person or 4) a person not more than 10 years younger than the account owner (i.e. sibling). A minor child becomes subject to the 10-year rule starting at the age of majority (age 18 in New York), so the account would be fully distributed before they turn age 29.

Unchanged under the new law – For IRA owners who die before age 72 and have named their estate, a non-qualified trust, or charity as beneficiary, the IRA must still be distributed within 5 years of the IRA owner’s death. If the IRA owner dies after age 72 with any of those beneficiaries, the inherited IRA beneficiaries would take the distributions over the deceased owner’s remaining life expectancy.

Penalty-free withdrawals for birth or adoption. A new exception to the 10% early withdrawal penalty was added under the new law for a qualified birth or adoption distribution of up to $5,000 per taxpayer. Also, the individual can later put the money back into the account and not have it count as a contribution.

More 529 Plan distributions are qualified education expenses for tax-free treatment. Retroactively to 1/1/19, up to $10,000 in withdrawals to pay principal and/or interest on qualified higher education loans now count as qualified education expenses for federal. However, they might not for the state. Be sure to check how your state’s 529 plan will treat withdrawals. For instance, New York’s 529 Plan hasn’t yet decided if those withdrawals will count as a qualified distribution, so you might want to wait for clarification. For instance, the 2017 federal tax law allowed withdrawals for K-12 tuition to be eligible expenses, but New York’s 529 plan didn’t consider them as higher education expenses, resulting in state tax consequences.

Also keep in mind that if you use 529 plan funds to pay interest on student loans, you can’t then deduct that interest “above-the-line’ on your tax return.

529 plan distributions for fees, books, supplies, and equipment required for the beneficiary’s participation in a registered apprenticeship program now count as qualified education expenses.

Kiddie tax. The kiddie tax rules in effect prior to the Tax Cuts and Jobs Act (TCJA) have been reinstated under the SECURE Act. Starting in 2020 (or retroactively to 2018 or 2019), the net unearned income of a child is taxed at the higher of the parent’s rate or the child’s.

The SECURE Act completely shakes everything up on retirement accounts. The implications will be different for everyone and should be viewed holistically. You may need to revamp your current estate plan to avoid any undesirable results. You may want to reconsider who your beneficiaries should be on retirement accounts, the structure of trusts formed in your will or revocable trust, how you satisfy charitable inclinations, and who should inherit which assets and how. Any existing trusts should be re-examined to see if they can and need to be modified. Roth IRA conversions should be evaluated in the context of the rest of your financial and tax situation like usual, but also in light of this law change. This also adds further considerations to the decisions on whether to contribute to a Roth IRA or Roth 401(k) over traditional accounts in your accumulation years.

Please do not delay in gaining an understanding of how the SECURE Act affects your company retirement plan and your tax, retirement, and estate plans. Reach out to our Bonadio team today to learn more.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.