Originally passing the House in July, approved on the 19thof December by the Senate, and signed into law on December 20thby President Donald Trump, the Setting Every Community Up for Retirement Enhancement Act of 2019 better known as the SECURE Act, includes significant changes that may impact your retirement planning. Today, we’ll be covering some of the most impactful changes for pre-retirees (and some currently in retirement). 

Let’s start with the new IRA rules that may impact retirees. 

Required Minimum Distribution age has been increased from 70.5 years old to 72.

Prior to the SECURE Act, you were required to start taking distributions from retirement accounts such as your 401k’s (if you were not still working at the company that held your 401k) and IRA’s starting at 70.5 years old. Now you can delay your first distribution until 72. 

You can still wait until April 1stafter the year you turn 72 to take your first RMD but, remember you will have to take two RMD’s in one year if you do wait. 

 What are some of the potential benefits to this for you as a retiree? 

1.    You can continue to contribute to your IRA past the previous 70.5 age limit. In fact, there is no age limit now. What does this mean for you? If you have any sort of part-time job (earned income from either wages or self-employment) in your late retirement years you can now defer tax on your income if you’d like by contributing up to $6,000 (plus a $1,000 catch-up contribution if over 50) per person per year which could mean up to $14,000/year if you are married.  

2.    If you are one of the many people that continue to work past 70.5 years old, previously you would have to take a required minimum distribution from your IRA’s even if you were still working! This was a horrible way to pay tax at what would most likely be a higher tax rate than post-retirement. 

If you receive certain foster care payments you can now make non-deductible IRA contributions. 

While this sounds great, we did lose a very valuable estate planning provision. The “stretch IRA” is gone. 

What does this mean? 

Previous to the SECURE Act, when you left an inheritance from your IRA to a non-spouse beneficiary, whoever inherited the account could use their life expectancy table for the distribution period and the account could continue to grow tax-deferred/tax-free. A very young beneficiary like a grandchild could have potentially enjoyed this tax preferred status for decades only having to take out a small RMD each year. 

Well, this is now gone. 

Now under the new law, non-spouse beneficiaries must empty the account within 10 years. 

There are some positives and negatives to this rule. 

For example, let’s say you inherit your parent’s IRA and you are planning to retire in 5 years. 

Well, now there are no specific RMD requirements, you just have to empty the account within 10 years. 

Going back to our example, this could be a benefit because you wouldn’t have to take anything out of the account when you’re working and most likely in a higher tax bracket. You could wait until after retirement to withdraw which would be at a lower tax rate. However, if the balance is large enough, you will want to do the tax planning to see if waiting until after retirement and only having 5 years to withdraw is a better financial move than starting while working and having 10 years to withdraw. 

This is similar to the existing 5 year rule for non-designated beneficiaries but now that there are no distribution requirements each year (you just have to empty the account within 10 years) this gives you flexibility to optimize for taxes. 

There is a caveat though..

Eligible beneficiaries are not subject to the new 10-Year Rule under the SECURE Act.

These beneficiaries who are referred to as “Eligible Designated Beneficiaries” are the following: 

·     Spousal beneficiaries

·     Disabled beneficiaries as defined by IRC Section 72(m)(7)

·     Chronically ill beneficiaries as defined by IRC Section 7702B(c)(2)

·     Individuals who are not more than 10 years younger than the decedent

·     Certain minor children (of the original retirement account owner) but only until the reach the age of majority

If the beneficiary falls into one of these eligible beneficiary categories, then the same rules apply as before the SECURE Act.

What if a trust is named as the retirement account beneficiary? 

This could cause you some problems. I am not an estate attorney but I would recommend you reach out to your estate planning attorney because from what it looks like, and with the language many trusts are written with, you may be limited to only taking your RMD in the 10thyear and this could be a huge tax bomb waiting to happen. The guidance is not fully clear yet, but, again, my recommendation would be to set an appointment with your estate planning attorney to get ahead of this potential problem. 

A couple questions I have heard so far are what if I turned 70.5 in December of 2019, is there any exception for me? Unfortunately, no. You will be beholden to the old rules. 

Can I still make qualified charitable distributions (QCD’s) at 70.5?

Fortunately, for the charitably inclined, the answer is YES! 

If you start making QCD’s after turning 70.5 or later, beginning in the year you turn 72, any amounts given to charity through a QCD will then reduce (or eliminate) your RMD requirement. 

One more nice benefit of the SECURE Act is that it will be easier for long-term part-time employees to participate in 401k’s at work. If you work at least 500 hours in at least 3 consecutive years at a job, you will be eligible to participate in your employers 401k plan. This will positively impact workers in the new “gig economy.” 

Hopefully, you found this helpful to your retirement planning. If you would like to discuss anything from what was discussed here, or other questions about your retirement strategy, we would be happy to speak with you on a complimentary consultation. 

You can schedule your complimentary call at keepitsimplefinancial.com/talk