Today, Congress passed the SECURE Act (Setting Every Community Up for Retirement Enhancement) which has been in the works for a number of years and is the first major piece of retirement law change in a decade. The bill includes several changes that impact both retirement plans as well as individual retirees, the latter of which we outline below.
SECURE Act and Required Minimum Distributions
Today, the age when Required Minimum Distributions (RMD) begin is the year in which the account owner turns 70½. The SECURE Act changes the age at which RMD’s begin to 72 effective on January 1, 2020. If you turned 70½ in 2019, you are still required to begin your RMD’s in 2019 but those turning 70½ after December 31, 2019 are given a reprieve until the year in which they turn age 72. This presents a unique opportunity for clients.
- We’ve often talked about how powerful the years between retirement and age 70 (when RMD’s traditionally began and our recommended Social Security starting age) can be from a tax planning perspective. We’ve traditionally used this time period to make Roth Conversions or accelerate IRA distributions into low tax years. The new RMD age of 72 creates more opportunity to do take advantage of this strategy (insert link blog on Gap Years).
Stretch RMD Changes
One of the more powerful estate planning tools under current law is the ability of non-spouse retirement account beneficiaries to stretch RMD’s over their life expectancy. For instance, if you inherit in a retirement account at age 40, your remaining life expectancy per the IRS is 43.6 years, and your RMD’s are spread over that time frame, allowing the account to grow tax-deferred or tax-free (for Roth IRA’s) over that time frame. The new law removes the ability to stretch distributions over life expectancy, instead limiting the time frame to 10 years. The exception to this rule is spouses, children under the age of majority, disabled beneficiaries, or beneficiaries within 10 years of the decedent.
- Making Inherited IRA distributions over a ten year period instead of over a lifetime accelerates and increases the tax due on the account. This makes Roth conversions, done over a number of years and specifically in the “gap years” we mentioned above, more attractive, to build a larger tax-free account to leave to beneficiaries.
- Beneficiaries have the ability to take distributions during the ten year period in any manner that they wish, and timing those distributions will be important to minimize taxation. For instance, if you inherit an IRA and plan to retire in five years you may want to backload the IRA distributions during the ten year period to minimize the tax due.
- Individuals who have Trusts named as beneficiaries of their IRA’s will want to revisit those trusts to be certain the language allows distributions to be made over the new ten year time frame rather than mandating distributions over the beneficiaries lifetime and reassess whether it still makes sense to have a Trust at all.
- One idea to recreate the stretch RMD, if you are charitably inclined, is to make the beneficiary of the retirement account a Charitable Remainder Trust. The Trust would pay the beneficiaries a percentage of the account for a set number of years or over lifetime and the remainder at the end of the term would go to charity.
Maximum Age for Traditional IRA Contributions
Previously the maximum age for making an IRA contribution was age 70½. With more individuals working longer, the SECURE Act repeals that maximum age and individuals with wage earnings at any age will now be able to contribute to a Traditional IRA beginning in 2020.
Please do not hesitate to reach out to us with any questions. For our clients, your Wealth Advisor will be reaching out to discuss any direct impacts to your situation.
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