What the SECURE Act Means for Your Retirement

By David K. Little, CFP®, CFA

Lost in the shuffle of the holidays, a trade war with China, and more instability in the Middle East was the end-of-the-year passage of the SECURE Act. The House actually passed the bill during the summer, but it didn’t make it through the Senate or past the President until the end of the year. The SECURE (Setting Every Community Up for Retirement Enhancement) Act is significant and has implications that will ultimately affect a high percentage of taxpayers in America.

Here’s a summary of some key provisions that affect IRAs and how they might apply to you.

New IRA Rules:

Required Minimum Distribution Date Changed

Probably the most relevant part of the act deals with how individual retirement accounts are handled. As you may know, when you approach retirement, the government wants to make sure it starts to recoup the tax savings it gave you when you made contributions to 401(k) plans and IRAs. In the past, that meant taking required minimum distributions (RMDs) starting at age 70½.

In the SECURE Act, the “required beginning date” for RMDs has been pushed back from the year you turn 70½ to the year you turn 72. This change helps people in a couple of ways. First, it eliminates that annoying half-year convention, which was always frustrating to calculate and explain.

Second, it allows you (if you want to) to avoid taking money out of your IRA or 401(k) for a year and a half longer than in past years. Some people may still want to take money out prior to 72, but for those in a position to delay distributions, the new law is helpful.

There’s a caveat here for people who were 70½ by the end of 2019: They need to continue taking minimum distributions as they were before. So, for those of you in that boat but who won’t be 72 until 2021, you don’t get to take a year off from your required distributions. You still have to take an RMD for 2020.

There’s also another technicality involving the required beginning date. Qualified charitable distributions (QCDs) from IRAs have been an increasingly valuable way to reduce taxes after the 2017 tax bill. QCDs cannot be made until a taxpayer turns 70½, which in the past coincided with the required beginning date for RMDs.

Notably, the SECURE Act did not change this age. So, unless there’s a technical update affecting this rule, taxpayers will still be eligible to make QCDs once they turn 70½, even though they won’t need to take RMDs until they turn 72. This may be a way to get money out of an IRA without paying taxes on it, and probably makes sense if a person has charitable intent.

“Stretch IRA” Mostly Eliminated

Another provision that affects IRAs is the elimination of the “stretch IRA.” Previously, an IRA beneficiary could generally take withdrawals from an inherited IRA over their own life expectancy.

This was a good way to reduce the tax liability on the withdrawals since a series of smaller withdrawals is generally taxed at a lower rate than one large withdrawal. For example, from an income tax perspective, it’s cheaper to take twenty $50,000 withdrawals than one $1,000,000 withdrawal.

The SECURE Act makes it mandatory for most beneficiaries to withdraw all their interest in an inherited IRA within 10 years of the original IRA owner’s death.

To put some numbers to this, a 50-year-old beneficiary has a life expectancy (according to the IRS) of about 34 years. If that 50-year-old inherits an IRA worth $1,000,000, they could previously withdraw the money (and pay taxes on it) over that 34-year period. Ignoring any potential earnings, that would lead to annual withdrawals of about $29,000 per year.

Under the new law, the beneficiary would need to take withdrawals of $100,000 per year over 10 years. Or, because of the way the law is written, the beneficiary could take nothing out of the IRA for nine years and then withdraw $1,000,000 in the 10th year.

This provision has probably gotten more press than any other provision in the bill, and for some beneficiaries, it will have a substantial effect. In our experience, though, most beneficiaries tend to withdraw their shares of inherited IRAs in less than 10 years. So, while the provision will cost some beneficiaries additional taxes, most beneficiaries won’t be too adversely affected.

Some beneficiaries aren’t subject to the 10-year rule, and they’re listed below. Aside from spousal beneficiaries, the other exceptions apply to a narrow segment of the population:

• Spousal beneficiaries

• Disabled persons

• Chronically ill persons

• Individuals not more than 10 years younger than the original IRA owner

• Some minor children of the original IRA owner

One more comment on the new 10-year rule: Many estate planning attorneys have drafted trusts designed to comply with now-defunct distribution rules. These trusts were generally known as “conduit trusts” and were designed to function as beneficiaries of IRAs.

Some of the language in those trusts needs to be reviewed to make sure the trusts will still function correctly under the new law. In a worst-case scenario, the trusts could force beneficiaries to receive a very large (and very taxable) distribution in the 10th year after an IRA owner passes away.

IRA Contributions Allowed After 70½

With more Americans working longer than in previous generations, this provision could help many people with their retirement savings. Previously, IRA contributions were not allowed after a person reached the age of 70½.

The SECURE Act does away with that limitation. So, assuming you have earned income that’s more than the amount of the IRA contribution you’d like to make, you can put up to $7,000 per year into IRAs for you and your spouse, even if you’re over 70½.

Other SECURE Act Provisions:

While the sections of the act that affect IRAs are probably the most important for our clients, other miscellaneous provisions are worth listing. We may review these in more detail in a later post, but here’s a quick overview of them:

• Annuities can be more easily included in retirement plans.

• Small businesses can get a bigger tax credit for establishing a retirement plan.

• Businesses can get credit for auto-enrolling employees into a 401(k), and at higher levels of deferral.

• 529 plans can be used for a wider array of expenses, including repayment of student loans.

If you have any questions about the information in this article and how it might apply to you, please contact us, and one of our advisors would be happy to analyze your individual situation and make recommendations to you.

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