On December 20, 2019, Congress passed the SECURE act revising a number of regulations primarily pertaining to the retirement system.
The two receiving the most press are:
1. Loss of the stretch out provision for non-spouses: Previously, a non-spouse could inherit an IRA and “stretch” out the withdrawals over their lifetime. The legislation eliminates this option although there are a few exceptions. The new rule states that the account must be emptied within 10 years of inheritance.
Depending upon the beneficiary’s tax situation, the distributions may add significant taxable income.
2. Instead taking your required minimum distribution at 70-1/2, you can wait until age 72. However, if you are using funds from your IRA to make Qualified Charitable Distributions and you are one day over 70-1/2, the contribution is not taxed.
For people whose distributions were handled using Conduit and Discretionary Trusts, please speak with your estate attorney about its impact under the 10-year rule to see what, if any changes need to be made. You may not want your beneficiary receiving all the money over 10 years when the original plan was to have payments over the lifetime(s) of the beneficiary(s).
Other provisions include:
- Ability to contribute to an IRA as long as you or your spouse have earned or self-employment income after age 70-1/2.
- Annuities options in retirement plans. The insurance industry was a huge supporter of the SECURE Act pushing the annuity option. By taking some limited actions to protect the employee, the Plan Sponsors limit their liability should something go wrong with the annuity/insurance carrier.
- Automatic enrollment in 401(k) plans. Employees are automatically enrolled in a plan up to 10% unless they opt-out. The new provision allows 15% and eligibility for some part-time employees.
- Requires 401(k) and other retirement plans to calculate from the total balance, an estimate of annual income based on that balance. The devil is in the details. How accurate and what assumptions are included in these calculations?
- Penalty free distribution up to $5,000 for an adoption or qualified birth.
- Tax credit for small businesses establishing a retirement plan.
- An easier process to create Multiple Employer Retirement Plans.
- Repeal of the Kiddie Tax Change enacted in the last tax legislation going back to the way it was (using the parents marginal tax bracket).
- Back to the 7.5% of AGI medical threshold though only for 2019 and 2020.
- Expanded usage for 529 college savings plans.
We suggest you work with your financial planner, estate attorney, and/or tax professional to assess how these changes impact you and your estate.