Effective January 1, 2020, the SECURE Act, a progressive change to retirement savings plans, is now law. The last legislation to retirement savings happened when Congress allowed for automatic enrollment of employees and the addition of Target Date funds to retirement plans in 2006.
While the new law intends to provide additional opportunities for Americans to save for retirement, other changes will affect both estate and retirement planning in these critical areas:
#1- Modification of the Required Minimum Distribution Age (RMD) rules for retirement plans to age 72.
With RMD now two years later, the opportunity for more straightforward conversions from taxable retirement savings accounts to tax-free retirement savings accounts provides an easier conversion than if already in the RMD phase. However, if an investor is already in the RMD phase, they are not able to reverse their distribution age.
Another part of the RMD modification is investors can still save into a tax-deductible retirement account until age 72, maximizing their pre-tax retirement savings and lowering their taxable income. As under prior law, if an employee is still working after age 72 and doesn’t own more than 5% of the employer they work for, RMD doesn’t apply until they retire.
The SECURE Act and RMD modification provide another beneficial change regarding contributions into traditional IRA accounts- there is no age restriction after 2019, and those working beyond age 72 can still contribute to their employer’s retirement plan.
#2- Inherited Qualified retirement accounts become more complex.
Under the SECURE Act, beneficiaries of inherited Qualified retirement accounts must liquidate the account within ten years, instead of their life expectancy as previously allowed. There is no RMD required during those ten years, but the account must value at zero after the tenth year of the benefactor’s death.
Exceptions to the 10-year distribution requirement include assets left to a surviving spouse, a minor child, a disabled or chronically ill individual, and beneficiaries who are less than ten years younger than the decedent.
#3- Expansion of retirement plan access for all American workers.
The SECURE Act aims to help Americans save more for retirement with advisory services and financial education now included as part of all company retirement plans. Small businesses previously left out of offering retirement plans due to the high cost of plan administration, will now be grouped with other small businesses to allow for cost-sharing. These groups of small business retirement plans are Multiple Employer Plans or MEPs, and the law provisions on these grouped plans don’t take effect until 2021.
#4- Increasing lifetime income options in all retirement plans.
The act will encourage employers to add lifetime income options, such as annuities, to their retirement plans. Additionally, employees can convert their retirement savings into guaranteed income within or outside of the employer plan while still employed if no guaranteed income options are available.
The SECURE Act additionally protects the employer from being sued if the guaranteed income insurer the employee chooses within the retirement plan is unable to make payments in the future.
#5- The law creates a side effect for IRA Qualified Charitable Distributions (QCDs).
After turning age 70 ½, clients can make qualified charitable distributions (QCDs) of up to $100,000 per year directly from an IRA. Active for QCDs made in any tax-year after 2019, the $100,000 limit is reduced (but not below zero) by the aggregate deductions before 2019. If a client made deductible qualified IRA contributions in the year that they turned age 70 ½ and before 2019, their annual QCD might be reduced for 2020 forward. Clients should consult their tax professional for clarification on this provision change
For those that have used QCD in the past as part of their estate planning, the law changes will impact their ability to lower their taxable income starting in 2020.
If you have any questions on how the SECURE Act may impact you, feel free to contact our office at any time.
*Advisory services offered through Trajan Wealth, L.L.C., an SEC-registered investment adviser.
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