At the end of 2019, President Trump signed the budget appropriations bill that included the Setting Up Every Community for Retirement Act, or the SECURE Act. This ACT includes sweeping changes to the retirement landscape that haven’t been addressed since 2006. The intent of the Act is to increase the opportunity for citizens to save for retirement through small business retirement plans, offering lifetime income inside current retirement plans through annuities, and making major changes in required minimum distributions. While there is no one-size fits all benefit of the SECURE ACT, there are certainly financial and estate planning opportunities that have arisen because of its enactment. If you’re feeling concerned about what to do with this information, please come in for a visit for some planning, or attend our Lunch and Learn on Thursday, February 13 at noon at Mercato Restaurant in Olympia.
The Good News
- The SECURE Act included a major change to the annual required minimum distribution from retirement accounts. As of January 1, 2020, those who have not yet turned 70½ can now wait until age 72 to start taking a required minimum distribution. This allows for an additional 18 months of growth in your retirement account(s).
One caveat of the SECURE Act – if you reached age 70½ on or before December 31, 2019 or have been taking required minimum distributions (RMD), you will still need to continue to take them. The same applies to those receiving annual RMD’s from retirement accounts they inherited.
- If you are still working and have earned income after turning age 70½, you can now contribute to an IRA. For 2020, that amount is $7,000. If a spouse is still working, they may also contribute $7,000, adding a total of $14,000 to your retirement accounts. Prior to the SECURE ACT, contributions, deductible or non-deductible were not allowed after age 70½.
- Smaller employers may join together to offer a qualified retirement plan, such as a 401(k), to reduce the administrative expenses of offering a plan to their employees. This may take a while to get established, but the goal is to reduce a barrier to offering a retirement plan. I’m proud that Sawston Wealth has offered a retirement plan and matching contribution for our employees since 2016.
The Planning Opportunities
- Beneficiary Reviews – Non-spouse beneficiaries of inherited retirement accounts must now take distributions of the entire amount of the account within ten years from the date of death of their benefactor. Before the SECURE Act, they could “stretch” out the distributions throughout their lifetime, reducing the tax implications of receiving an annual distribution. This applies to those accounts where the owner dies after January 1, 2020.
“Exempt from the 10-year stretch provisions are surviving spouses, minor children up until the age of majority, individuals within 10 years of age of the deceased, the chronically ill and the disabled.”
- Trust Planning – If you’ve named a trust as beneficiary of your retirement account(s) to allow for creditor protection or take advantage of the stretch provision for beneficiaries, if the trust language states that the beneficiary only has access to the RMD each year, under the new rules, there is no RMD until year 10 after the year of death. “This means the IRA money could be held up in the trust for 10 years and then all be distributed as a taxable event on year 10.” That could cause a significant tax hit to the beneficiaries of the trust.
- Roth Conversions – Perhaps it’s time to look at converting your tax-deferred retirement accounts to an after-tax Roth. “While Roth IRAs are subject to RMDs when inherited, they typically do not cause a taxable event when distributions are taken by a beneficiary. As such, it can make a lot of sense (with lower tax rates under the Tax Cut and Jobs Act) before the owner of the IRA passes away to strategically do Roth conversions to move money from an IRA to a Roth IRA.”
- Life Insurance as a wealth replacement – Now with the stretch feature downgraded from lifetime to just ten years for beneficiaries, it might be time to look at life insurance as a wealth replacement strategy and name a charity as beneficiary of a retirement account since there would be no tax implication to them. In this scenario, the owner of the account uses the RMD distribution while they are living to buy life insurance, naming a non-spouse as beneficiary of the life insurance. Once they pass away, the proceeds of the insurance transfer to the beneficiary tax-free.
Whatever your personal situation, there are important considerations and planning opportunities with this new legislation. We’re here to assist with strategies to reach your goals.