Opportunities and Challenges from the SECURE Act
Updated: May 7
During the final weeks of 2019, the Senate passed significant tax and retirement reforms that were signed into law by the President. The reforms have wide-sweeping implications for IRAs, 401(k)s, 529s and more.
For our clients, many of the most important changes will impact IRAs. Most notable is the elimination of the “stretch” provision for most non-spousal beneficiaries of inherited IRAs. For those who have already inherited IRAs, they will continue to be grandfathered under the old rules which allowed the beneficiary to take distributions over their entire life expectancy. Going forward from 2020 and beyond, beneficiaries will now only have 10 years to empty an inherited IRA account. For those who inherit IRAs, this could have significant tax implications especially if inherited during peak earning years. There is, however, no longer an annual distribution requirement which may offer some unique planning opportunities. The act only states that the IRA must depleted by the end of 10 years. It does not specify how much needs to be taken each year. If one was near retirement, for example, it would make sense to not take any distributions from an inherited IRA initially and then draw it down immediately upon entering retirement before touching one's own funds once retired. As a reminder, this is for non-spousal beneficiaries and there are exceptions for those who are disabled and chronically ill among a few others.
There is, however, no longer an annual distribution requirement which may offer some unique planning opportunities. The act only states that the IRA must depleted by the end of 10 years. It does not specify how much needs to be taken each year.
For those who name their trust as the beneficiary of their IRA (not our typical recommendation but there are circumstances where it makes sense), it could be important to review the verbiage of the trust to make sure it aligns with the new law change. For example, if the trust mandated that only the required minimum distribution be paid out annually on the inherited IRA, that could have the unintended consequence of freezing the account for 9 years and then have the full amount paid out in the 10th. Future IRS guidance will hopefully clear up this issue, but it does not hurt to exercise caution with such large potential implications and have your trust reviewed if you're unsure.
The other major change, albeit with less planning opportunities, is the shift of required minimum distribution (RMDs) from age 70.5 to age 72. This will only impact those turning 70.5 after January 1st, 2020. This is not a huge change but at least one in a favorable direction. As a reminder, the first RMD can be delayed until April 1st of the year following the year in which you turn 72. However, this could cause a doubling up of distributions in that year and some careful planning would be required before delaying the distribution.
The other significant impact of the SECURE Act will be to 401(k)s and other employer retirement plans. One of the biggest backers (especially financially) of the act was insurance companies. The SECURE Act has opened the door for annuities to be allowed in retirement plans much more easily. While annuities are not inherently good or bad, they can be expensive, restrictive, and complex. Expect to see a major push by insurance companies (most likely through your plan provider) to use more and more annuities for your retirement funds. Which annuities will become prevalent will be a trend we will be watching very closely going forward.
For small business owners, bigger tax credits are now available for establishing a retirement plan. There is also a new credit for the adoption of an auto-enrollment feature. For our small business owners, it is worth contacting your accountant to make sure you are getting these credits.
529 plans will again see their options for qualified education expenses expanded. After the Tax Cuts and Jobs Act saw the use of 529s expanded to K-12 expenses (up to $10k annually), the SECURE Act adds additional options. Registered and approved apprenticeship programs with the Department of Labor will now qualify as a higher education expense. Also, and more significantly, “Qualified Education Loan Repayments” are now considered higher education expenses (limited to $10k lifetime per person). With the portability of 529 plan beneficiaries, this will open the door to help family members who have already gone to school and are still paying back student loans.
While these are the most likely to impact our clients, there are many more changes included in the SECURE Act such as qualified birth and adoption distribution exemptions, the elimination of 401(k) credit cards (a terrible idea to begin with), the ability to contribute to IRAs past 70.5 while working, and much more. If you'd like to learn more about some of these topics, we invite you to join us for our upcoming Investor Conference in Westlake Village where one of our guest speakers will be offering his professional insights on current tax law and how to make the most of these changes. Additionally, if you have specific questions on how this might impact you, always feel free to reach out or, for our clients, ask during your next planning meeting.
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