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February 25, 2020

4 SECURE Act Provisions B|O|S Clients With IRAs Need To Know

Please read important disclosures and index definitions HERE

On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act, better known as the SECURE Act. It’s one of the most robust changes to retirement legislation since the Pension Protection Act of 2006.

4 SECURE Act Provisions B|O|S Clients With IRAs Need To Know

According to a Gallup poll from April 2018, 46 percent of U.S. non-retirees believe they won’t have enough money in retirement. As such, the SECURE Act is intended to strengthen retirement security across the country, boost retirement savings, and encourage more people to address their potential retirement savings shortfalls.

The legislation went into effect on January 1, 2020, thus creating new opportunities for retirement planning, saving, and spending. However, given that the SECURE Act contains some 30 provisions that affect the retirement system, it’s difficult to determine how the new changes might affect you. Because this new legislation is rich in complexity and industry jargon, it’s best to discuss with your B|O|S team on how the SECURE Act could affect your retirement plans.

To give you an idea of some of the new changes created by the SECURE Act, here are four major provisions that may impact B|O|S clients.

  1. ‘Stretch’ IRA Is Replaced with a New 10-Year Rule

One notable change ushered in by the SECURE Act affects people who inherit an IRA or other retirement vehicle from a non-spouse.

Previously, those inheriting an IRA from a non-spouse could take required minimum distributions (RMDs) based on their age. Younger individuals would have lower RMDs than those who were older, while the percentage to be withdrawn would increase annually. This was known as the “stretch” IRA because one could stretch out the distributions over her or his lifetime and enjoy tax-deferred compounding of the money not required to be withdrawn.

Under the SECURE Act, however, the inherited IRA must be distributed, in full, within 10 years of when non-spouse individuals receive it. This will require some extra planning, especially for those with larger IRA values, as their heirs will often be required to take out the full amount during their peak earning years. Inheritors of IRAs will also have to consider the timing of distributions within the new 10-year requirement, as the distribution could put them into a higher tax bracket.

If you’re interested in managing the tax impact of the new 10-year rule on behalf of your beneficiaries, you should consider doing partial Roth conversions now, while you’re still alive. By essentially pre-paying the taxes on behalf of your beneficiaries, the person(s) inheriting the Roth will receive their distributions tax-free. In short, the SECURE Act’s new 10-year rule is another reason to consider a Roth IRA conversion sooner rather than later.

  1. Age Increase for Required Minimum Distributions (RMDs)

RMDs are minimum amounts that a person must annually withdraw from their traditional IRA, 401(k), 403(b) or other retirement savings plan once they reach a mandatory age, regardless of their retirement status. The SECURE Act has raised that minimum RMD age from 70½ to 72 for those born after June 30, 1949.

In other words, those who did not turn 70½ years old by December 31, 2019 (yes, in the world of finance, we care about half birthdays) now have until they turn 72 before they have to think about RMDs.

In reality, this isn’t a significant change. Compared to the previous law, there is now an extra 18 months of compounded growth before RMDs and their corresponding taxes are due. Withdrawals from IRA accounts, including RMDs, after age 59½ are considered taxable income and taxed at ordinary income rates.

Mirroring the current law, when one reaches age 72, she or he may delay their first RMD until April 1 of the year following the year she or he turns 72. For example, if you turn 72 on October 4, 2021, you can take your RMD as late as April 1, 2022. In this case, two RMDs would be due in 2022, one for turning 72 in 2021 and a second for turning 73 in 2022. Depending on your particular tax situation at the time, this may or may not be to your advantage.

  1. Changes to Qualified Charitable Distributions (QCD)

Even though someone turning 70½ in 2020 won’t have to take an RMD for 2020, they may still use their IRA to make a QCD of up to $100,000 for the year. The Tax Cuts and Jobs Act from 2018 increased the standard deduction and changed itemized deductions rules so that the standard deduction is now higher for some. For those taking the standard deduction, there’s no direct tax benefit from making charitable donations, since they no longer itemize. In this case, a QCD may be a viable alternative for charitable giving as it has a two-fold benefit. First, amounts given as a QCD count toward completing a RMD. Second, QCD amounts are not taxable.

For example, if your RMD is $10,000 for 2020 and you give $1,000 to charity and process a $9,000 RMD, then your RMD is complete for 2020 with taxable income of only $9,000. The $1,000 QCD wouldn’t be taxed.

  1. IRA Contributions After Age 70½ Are Now Permitted

The SECURE Act allows those working beyond age 70½ to now make IRA contributions. The new rules also allow working spouses to make IRA contributions on behalf of their non-working spouses into the latter’s IRA. This may have a marginal impact, as the maximum IRA contribution for those older than 50 years old is $7,000 per year. However, even before the SECURE Act went into effect, those who are older than age 70½ and who are still working were already able to contribute to their Roth IRAs and 401(k) plans.

Whereas we’ve highlighted four provisions of the SECURE Act that we think are broadly applicable to our B|O|S clients, there are several other changes made to Americans’ retirement plans, as summarized in the below table.

If you have any questions about how the new SECURE Act legislation might affect you, your family, and your finances, feel free to reach out to your B|O|S client service team.

Filed under: Financial Planning

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