The SECURE Act, or the Setting Every Community Up For Retirement Enhancement Act, was recently passed into law, to the surprise of many, and went into effect as of January 1, 2020. The SECURE Act is a comprehensive bill that could have significant implications as to retirement and savings. Financial experts are still in the process of determining what the long term effects of the SECURE Act may be and how your estate planning strategy should change in light of the Act. Below is a discussion of some of the most impactful provisions of the SECURE Act:
Them most highly discussed provision of the SECURE Act is the loss of the stretch IRA option for most non-spouse beneficiaries. While a spouse may still inherit a traditional IRA and “roll it over” to treat it as their own, most non-spouse beneficiaries are required to withdraw all assets of the inherited account by the end of the 10th year from the time of the IRA-holder’s death. Prior to the SECURE Act, a non-spouse beneficiary was able to stretch the distribution over their life expectancy. (If a non-spouse beneficiary has inherited an IRA from an individual who died in 2019 but the beneficiary was not able to elect the stretch option until 2020, that beneficiary will still retain the ability to stretch the distributions over his or her lifetime.)
The removal of the stretch option has been a very unpopular change for individuals heavily invested in their IRA who intended to use the IRA as a legacy tool to provide for children, grandchildren, etc. Distributions from an inherited IRA over the life of a non-spouse beneficiary are still allowed if the beneficiary is a minor, disabled, chronically ill, or within 10 years of age of the deceased IRA owner. However, for minors the exception only applies until the child reaches the age of majority, at which time the 10-year rule begins.
Another highly discussed provision from the SECURE Act is the increase in age for required minimum distributions (RMDs). Beginning in 2020, the age an individual must begin taking RMDs from a qualified retirement account increased from age 70½ to age 72. To be clear, if you were already required to take RMDs prior to January 1, 2020, then you are still locked into the old rule and must continue to take those RMDs. However, if you had not reached 70½ years of age by January 1, 2020, then you are not required to take any RMDs until you turn 72. While losing the stretch IRA option has been unpopular, the increase in age for RMDs has mostly been a welcomed change.
There are many other changes resulting from the SECURE Act that have not generated as much discussion as the two previously discussed, but which still affect retirement planning. For example, the Act repealed the maximum age to make contributions for traditional IRAs. Prior to the SECURE Act, taxpayers over the age of 70½ were ineligible to contribute to their traditional IRA. With the SECURE Act, individuals may now make contributions past age 70½ .
Another less talked about change resulting from the SECURE Act is the increased tax credits available to small employers that adopt a new 401(k) or other workplace plan. The new bill increased the maximum credit for start-up plans from $500 to $5,000.
One last provision worth mentioning is the expansion of 529 savings plans. Parents who have contributed to section 529 Plans can now use assets from these accounts to cover a wider variety of costs associated with education, qualified apprenticeships, and for up to $10,000 in student loan repayment.
How does The SECURE Act impact you? Call to set up a time to review your estate plan and discuss how the SECURE Act may affect your long term goals.