The SECURE Act: A Few Things You Need to Know

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed by Congress and signed by President Trump in December of 2019, formalizes some significant changes to our retirement system. Individuals approaching age 70 ½ and those working for smaller companies may be impacted the most. The following is a summary of some of the major changes.

Stretch IRAs

New Law: Individuals who inherit an IRA may no longer “stretch” the required minimum distribution (RMD) payments over their lifetime. The inherited IRA must be paid out by the end of the tenth year following the year of inheritance. For example, if an IRA owner dies on January 2, 2020, the beneficiary must withdraw the entire balance by December 31, 2030. The ten-year rule applies no matter the age of the decedent. “Eligible Designated Beneficiaries” may continue to stretch receipt of payments from an inherited IRA.

Eligible Designated Beneficiaries are defined as the following:

• Spouse;
• Disabled as defined by IRC Section 72(m)(7);
• Chronically ill as defined by IRC Section 7702B(c)(2), with limited exceptions;
• Individuals who are not more than 10 years younger than the decedent; and
• Minor children of the deceased IRA owner until they reach the age of majority. Once they reach the age of majority (determined by each state), the 10-year rule begins.

Planning Challenge: If your IRA pays to a trust for the benefit of a beneficiary, please check with your estate planning attorney to confirm that the current language in your estate documents works with this new rule. If the trust document states that trust distributions will only be made for purposes of complying with RMD requirements, you may have cause for concern. Under the new law, an IRA subject to the new ten-year requirement technically would only have a required distribution in the tenth year. This would result in zero distributions during the first nine years and then a 100% distribution in the tenth year. For most IRA owners, this is likely not a desirable sequence.

Required Minimum Distributions (RMD)

New Law: Individuals who turn 70 ½ on January 1, 2020, or later are not required to start taking required minimum distributions (RMDs) until age 72. Prior law required that RMDs commence after age 70 ½. The new rules permit deferring the first distribution until April 1^st of the year the account owner reaches age 73. However, individuals postponing the first required distribution until age 73 will be required to take two distributions that year. The penalty for failing to take an RMD is 50% of the shortfall.

Individuals who turned 70 ½ in 2019 or before must continue to take annual RMDs. If you turned 70 ½ in 2019 and postponed your first RMD to 2020, you too must continue to take annual RMDs and take two in 2020.

Qualified Charitable Distributions (QCD)

Individuals over the age of 70 ½ may continue to make QCDs of up to $100,000 each year.

Planning Challenge: QCDs made in 2020 and subsequent years will need to be modified if the individual continues to make deductible contributions to a traditional IRA after the age of 70 ½. See example below.

Traditional IRA Contributions

New Law: Traditional IRA contributions are allowed for any individual with earned income. This includes spousal IRA contributions. Under prior law, IRA contributions were not allowed past the age of 70 ½.

Planning Challenge: Making IRA contributions past the age of 70 ½ can create complications for those who plan to make qualified charitable distributions (QCDs). The amount of the QCD one would be eligible to deduct on a tax return will be reduced (but not below zero) by the amount of any traditional IRA contributions made after age 70 ½. This would require tracking IRA contributions made past the age of 70 ½.

Example: Mary Lou is 71 and continues to work part-time at Bragg. Mary Lou earns $20,000 per year and makes a $7,000 deductible contribution to her traditional IRA. Mary Lou makes these deductible IRA contributions for three years and then retires. In the year of her retirement, she utilizes a QCD and gifts $30,000 to her church from her IRA. The SECURE Act states that Mary Lou must offset her QCD with the post-70 ½ IRA contributions made. Mary Lou will only be able to claim a QCD for $9,000 ($30,000 – $21,000). The remaining $21,000 of the gift may be claimed as a charitable gift via itemized deductions.

Additional Provisions

Compensation for IRA contribution eligibility purposes: Individuals in pursuit of a graduate degree or post-doctoral study may include taxable non-tuition fellowship and stipend payments as earned income.

529 Plan Qualified Education Expenses: Penalty- and tax-free distributions may be taken from 529 plans to pay the principal and interest of qualified education loans. There is a $10,000 per-person (beneficiary) lifetime cumulative limit. An additional $10,000 may be distributed to repay outstanding student debt for each of the 529 plan beneficiary’s siblings.

Kiddie Tax: Children’s income reverts to being subject to the parent’s tax rates instead of trust tax rates. The change is effective for 2020. Taxpayers can elect to apply this rule to 2018 and 2019. See your CPA to determine if you should amend your returns.

Medical Itemized Deductions: Congress lowered the AGI “hurdle rate” to deduct qualified medical expenses back to 7.5% (from 10%) and retroactively applied it for 2019 and 2020.

We hope this gives you a basic understanding of the provisions of the SECURE Act that might impact you. You may want to speak with us, your CPA, or your estate planning lawyer to learn how it will impact you. We look forward to the opportunity to serve you.

This information is believed to be accurate but should not be used as specific investment or tax advice. You should always consult your tax professional or other advisors before acting on the ideas presented here.