Broker Check

Setting Every Community Up for Retirement Enhancement (SECURE) Act

At Perseus Wealth, it is important to us that you are well informed about what’s happening not only in the markets but about issues that can impact you and the people you care about most. On December 18th, 2019, the 2020 appropriations bill was approved. An important amendment that had been attached to the broader appropriations bill, the SECURE Act (Setting Every Community Up for Retirement Enhancement), passed as part of it. This bill, while dealing with multiple aspects of qualified plans, also impacted several characteristics of individuals’ retirement assets and planning. The following are what we believe are the four most important features that could impact individual retirement planning and that have been changed effective with the January 1, 2020 enactment date.

Increased Required Beginning Date – The SECURE Act increases the age triggering the required beginning date for plans and IRAs to 72. The Act states that the beginning RMD age is shifted to age 72 for those who reach the age of 70½ starting in year 2020. This would mean that those reaching age 70½ in 2019 would need to continue to take RMD’s in 2020.

“Stretch” RMD – The SECURE Act imposes a 10-year distribution limit for most non-spouse beneficiaries to spend down inherited IRAs and defined-contribution plans. Before passage of the Act, withdrawals from inherited accounts could be stretched over the life of beneficiaries to mitigate taxes. Exceptions to the 10-year distribution requirement include assets left to a surviving spouse, a minor child (however, the minor will become subject to the 10 year distribution limit once they reach their state’s age of majority), a disabled or chronically ill individual, and beneficiaries who are less than 10 years younger than the decedent.

Post-70½ IRA Contributions – The prohibition on making deductible contributions to a traditional IRA after age 70½ is repealed. Individuals older than age 70½ who have earned income can now continue to contribute to their IRA but, if RMD’s apply, continue to take RMD distributions at the same time.

Plan Withdrawals for Birth or Adoption – The SECURE Act allows an exception to the 10 percent penalty for birth or adoption. New parents can now withdraw up to $5,000 from a retirement account within a year of a child’s birth or adoption without the 10 percent penalty those younger than 59 1/2 would normally owe. The distribution, which is still subject to tax, can be repaid to a retirement account. The $5,000 cap is available for both spouses if they have individual retirement assets.

Of these changes, the one that will likely have the greatest negative impact for most people is the elimination (in most cases) of the “stretch IRA” for inter-generational retirement account bequests. The old rules enabled children (or even grandchildren) to receive retirement accounts as beneficiaries and continue tax deferral on those assets for their entire lifetime, possibly decades into the future, while receiving relatively small required RMD distributions during their lifetimes (based on the age of the beneficiary). Under the new rules, adult beneficiaries of retirement accounts will have to recognize 100% of the taxable account assets in no more than 10 years, potentially at the peak of their own earning years, forcing what may become their highest tax burden to date. Given the current individual estate tax exemption amount of $11,580,000 (for a married couple potentially $23,160,000), the impact of a possible 40% estate tax has currently (at least until 2026) been eliminated for more than 97% of Americans; with a maximum Federal income tax bracket of 37%, the income taxes associated with beneficiary IRA’s could now be the biggest tax burden to be addressed in estate planning.

  • The bad news: This means that virtually all estate plans will need to be re-visited and changes will likely need to be made.
  • The good news: There are a number of strategies already being discussed and evaluated to (hopefully) minimize the negative impact of this change on a lifetime of dedicated, tax smart savings and investing: Creative uses of life insurance, modifying existing trusts, employing different types of trusts, using Roth IRA conversions, utilizing charitable vehicles, et al are all “in the mix” depending on individual circumstances and preferences.


We plan to be discussing this issue with you in our regular meetings but, if you feel greater urgency to begin the discussion sooner, please feel free to contact us at your convenience.

 

Best always,


John and Sean

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that any strategy will be successful. The content provided herein is based on our interpretation of the SECURE Act and is not intended to be legal advice or provide a tax opinion.  This document is a summary only and not meant to represent all provisions within the SECURE Act.