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ACM Journal - Investment Management
17 Jan

Chris’ Corner – The SECURE Act – Q4 2019 Newsletter

On December 20th, the President signed into law the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The law is intended to increase retirement savings by expanding investment options and changing some of the qualified account rules. The SECURE Act may help some savers, but it comes with some negative consequences for estate planning and inheritors. Let’s look at how some of the changes affect you.

Required Minimum Distribution (RMD) age

Prior to the SECURE Act, you were required to start drawing money from IRAs and other qualified retirement plans after the year you turned 70 ½. The new age for RMDs is now 72. If you turned 70 ½ before 2020, you are still required to follow the prior law’s RMD rules.

No age restrictions on traditional IRA contributions

As a result of the Act, you can now make contributions to a traditional IRA at any age. Prior to passing, you could only contribute until you were 70 ½. There are still no age restrictions on ROTH IRA contributions.

A side-effect of these post 70 ½ contributions, however, is that they limit your Qualified Charitable Distribution (QCD) limit. QCDs allow you to donate directly from your IRA to a qualifying charity without counting the distribution as income. Currently, QCD limits are $100,000, but as a result of the Act, any contributions after 70 ½ reduce your allowance.

No more Stretch IRAs

The Stretch IRA was a common financial planning tool that allowed inheritors of IRAs, and other qualified accounts, to extend withdraws over a lifetime and sometimes over several generations. The rules allowed non-spouse beneficiaries of IRAs to take distributions based on their age. As a result, the amounts that were withdrawn, which are considered taxable income, could be spread over the course of your lifetime and optimized for years where high-income brackets could be avoided.

The SECURE Act eliminates this option, except for eligible designated beneficiaries, and now requires all funds to be distributed within 10 years of the death of the original account holder. The eligible designated beneficiaries that can still use the current rules include surviving spouses, minor children of the deceased (not grandchildren), a chronically ill individual, and a beneficiary who is no more than 10 years younger than the deceased. Despite these carve outs, in most situations the rules change will cause a significant higher tax liability on retirement funds.

Here’s how: Most people designate their spouse as their primary beneficiary, and then their children as the contingent beneficiary. If you and your spouse have children and pass away at a reasonable age, it’s likely that your children are in the peak earning years of their careers, and in the highest tax brackets of their lives. Prior to the SECURE Act, your children would be able to distribute their inheritance over their full life expectancy at lower tax rates, and in many cases, pass it again down to their children. Now, unfortunately, they will have to take it out over the course of 10 years.

The new rules also do not require that you make distributions in any given year. So, if you have a procrastinator or someone not mindful of tax optimization that inherits your money, they could be forced to distribute it all in one year at a likely much higher tax rate or face significant penalties.

Why did our distinguished elected officials do this? We may be jaded, but the evidence points to tax revenue more than to concern over constituents’ retirement wellbeing. One estimate by the Congressional Research Service showed that changing the stretch IRA rules alone will increase tax revenue by $15.7 billion over the next decade.

What can we do in response? Revisit the different parts of your retirement and estate plan, including possibly lowering your balance in your IRAs during retirement, doing Roth IRA conversions, gifting to your beneficiaries while you’re still alive, delaying Social Security, adding life insurance, reviewing your will, and possibly changing your beneficiaries on qualified accounts. Everyone’s situation is unique, so it’s likely that the new SECURE act will require some combination of tweaks to help optimize your retirement plan. We’re happy to review this with you anytime.

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