By Jennifer Verbrigghe, Vice President – Trust Advisor
It is well documented that many Americans are woefully under-prepared for retirement. Most employers do not offer the defined benefit pension plans that were more common in the last century, and Social Security monthly benefits do not come close to meeting rising healthcare and retirement expenses. In recognition of these challenges, Congress drafted landmark legislation to modify the current IRA and Retirement Plan rules.
In December 2019, the Setting Every Community Up for Retirement Act (the SECURE Act) became law. Despite the obvious stretch for a suitable acronym, there are very important changes within this bipartisan bill that could have significant consequences for you and your family. In an effort to be tax-neutral, the rules that allow for greater deferral of taxes to incent retirement savings are offset by other rules that accelerate the collection of income tax in certain situations.
First Business Bank’s Private Wealth team wants to ensure that our clients are educated on the important provisions of this legislation and prepared to take appropriate action. As usual, the effects of this legislation depend on your individual circumstances. Here we seek to provide a summary of the most relevant changes, and look forward to having further planning discussions with you in the coming months.
Required Minimum Distributions (RMD)
The age that an owner of an IRA or qualified retirement plan is required to start taking distributions from their tax-advantaged accounts has increased from 70½ to 72 years. If you turned 70½ prior to January 1, 2020, there is no change and you must continue with your RMD each year under the pre-SECURE Act rules. However, if you were under age 70½ when the clock struck midnight on December 31, 2019, you can now defer your RMD to age 72, thus allowing additional time to maximize the benefits of your tax-deferred accounts.
Elimination of the Stretch IRA
You may not be familiar with the term “Stretch IRA”, but the old rules provided a significant tax benefit for younger non-spouse beneficiaries, typically children and grandchildren, who have Inherited IRAs. Prior to the SECURE Act, when the original owner died and had designated younger non-spouse beneficiaries, those beneficiaries were able to stretch the required minimum distributions out over their lifetimes, often deferring taxes for many decades. The SECURE Act significantly limits that benefit by requiring non-spouse beneficiaries (with limited exceptions, including for a minor child or chronically ill individual, as defined) to completely withdraw the IRA assets by December 31st of the year that contains the 10th anniversary of the account owner’s death (the “Liquidation Date”). This new “Ten-Year Rule” becomes effective for account owners dying after December 31, 2019. It should be noted that there are no RMDs during the 10-year period leading up to the Liquidation Date, which will allow for some strategic income tax planning with the timing of distributions. It will be important to review all of your IRA and qualified retirement plan beneficiaries, and consider the consequences of this change.
IRAs Payable to Trusts
Your estate plan may include a trust that is specially designed to hold IRA and Retirement Plan assets. In the past, such trusts had allowed beneficiaries to take IRA RMDs over the designated beneficiary’s lifetime, while still allowing the trustee to exercise significant control over the bulk of the IRA remaining in the trust. The SECURE Act makes significant changes to the payout rules and tax impacts of these retirement benefit trusts.
Tax Deductible Contributions to Traditional IRA
Prior to the SECURE Act, you could not contribute to a Traditional IRA in the year you turned 70 ½ and thereafter. Starting with the 2020 tax year, this age restriction is eliminated, so you can contribute regardless of age, subject to the annual limitations. For 2020, the annual limit is $6,000 per person, plus an additional $1,000 if you are age 50 or older on December 31, 2020. For all IRA contributions, your contribution is still limited to the amount of your earned income. While this change is only relevant for people who continue to work and generate earned income beyond age 70½, we know that many retirees have taken up second careers or part-time jobs and may be in a position to take advantage of this provision.
Qualified Charitable Distributions (QCD)
It is also worth mentioning that the law, which allows an individual to directly give up to $100,000 from their IRA to a qualified charity without recognition of income, has not changed; the strategy can still be used at age 70½ even though the RMD age has changed to 72 years. There is, however, a conforming change resulting from the SECURE Act’s new rule allowing deductible IRA contributions after age 70½ that reduces the amount of a QCD that can be excluded from income by the aggregate amount of deductions allowed for IRA contributions. Nevertheless, the QCD is still a valuable charitable giving tool.
The impact of the SECURE Act varies dramatically based on each taxpayer’s unique circumstances. For some, it is a great opportunity to build up retirement assets; for others, it may significantly reduce the ability to defer taxes. Certainly, it warrants a conversation for all.
Contact us to learn more about how the SECURE Act will affect your personal financial situation this year and beyond.CONTACT US