Evaluating How the SECURE ACT may Affect you

Each new year brings with it the implementation of new laws, especially financial and tax laws. At the end of 2017 Congress passed the largest piece of tax reform legislation in more than three decades, lowering marginal brackets for all taxpayers. Now we find that at the end of 2019, prior to the holidays, Congress passed the Setting Every Community Up for Retirement Enhancement Act of 2019. That’s a bit of a mouthful, so they are referring to it simply as THE SECURE ACT. This law will affect many retirees and their immediate families.

Americans are living longer: Let’s begin with a positive part of the legislation which is that Congress repealed the prohibition on contributions to a traditional IRA by an individual who has attained age 70 ½. As Americans live longer, an increasing number continue to be employed beyond traditional retirement age, which in the past has been age 65. With that in mind, they increased the age for beginning Required Mandatory Distributions (RMDs). The bill increases the required minimum distribution age from 70 ½ to 72.

Stretch IRAs: Modifying the minimum distribution rules with respect to IRA balances upon the death of an account owner was Congress’s attempt to raise taxes in 2019. We often discuss in our client meetings the strategy of “The Stretch IRA.” The SECURE Act is the elimination of the so-called “stretch” provision for most (but not all) non-spouse beneficiaries of inherited IRAs and other retirement accounts. Under current law, non-spouse designated beneficiaries can take distributions over their life expectancy, but for many retirement account owners who pass away in 2020 and beyond, beneficiaries will have only 10 years to empty the account.

Without any other distribution requirements within those 10 years, designated beneficiaries will have some flexibility around the timing of those distributions. However, certain types of “see-through” trusts that have been drafted to serve as beneficiaries of retirement accounts may find that they’re no longer able to make annual distributions to the trust under the new rules. This may require a visit to the attorney that drafted your estate planning documents to ensure compliance with these new changes.

Family Friendly: For those who have established 529s for their children or grandchildren, the legislation expands 529 education savings accounts to cover costs associated with registered apprenticeships, homeschooling, up to $10,000 of qualified student loan repayments (including those for siblings), and private elementary, secondary, or religious schools. With student debt on the rise, this may allow graduates to repay loans earlier. Finally, the law allows a parent to take out up to $5,000 penalty-free from a 401(k) plan for costs connected to a birth or adoption.

Although the SECURE Act of 2019 is not as sweeping as the Tax Cuts and Jobs Act of 2017, there are numerous changes to the rules around retirement plans. We plan to re-evaluate the current plans for our clients and how they may be impacted by the new and updated provisions introduced by the SECURE Act. Whether you’re concerned about you or a family member’s financial planning, as your trusted financial professional, we are committed to making the transition to the SECURE Act rules as smooth as possible.