On December 20, 2019, the "Setting Every Community Up for Retirement Enhancement" (SECURE) Act was signed into law by President Trump. This legislation will impact and change the way investors plan for their retirement for years to come.
What These Changes Mean For You
1. The SECURE Act increases the required beginning date (RBD) by which you, a retirement plan participant, must begin to receive annual required minimum distributions (RMDs) from your IRA or employer-sponsored retirement plan (with few exceptions). Under the new law, the date for RMDs has increased to April 1st of the year after the year your turn 72 (from April 1st of the year after the year you turn 70 ½). This means that your retirement funds in the IRA (including any SIMPLE and SEP IRA you own) and employer-sponsored retirement plan can grow tax deferred for an extra year-and-a-half without being depleted by distributions and taxes.
If you reached age 70 ½ in 2019 or earlier, you are not affected by these changes and must continue to take your RMDs.
If you reach age 70 ½ in 2020, you will likely receive an RMD notice from your IRA Custodian/Trustee, explaining that you need to take an RMD for 2020. IRA Custodians are required to send an RMD notice to an IRA owner, by January 1 of the year for which the IRA owner is required to take an RMD. While this notice would not apply to you if you reach age 70 ½ in 2020, you might still receive one if your IRA Custodian had already scheduled the RMD notice to be sent to you, and was unable cancel such notice. If you do receive an RMD notice because you reach age 70 ½ in 2020, you may disregard it, as you would not be subject to the RMD rules until you reach age 72.
If you miss your RMD deadline, you will still owe the IRS a penalty of 50% of the amount that was not taken by the deadline. For instance, if your RMD for the year is $10,000 and you took only $2,000 by the deadline, you will owe the IRS a penalty of $4,000 on the $8,000 which was not taken by the deadline.
Impact on Roth IRAs:
The RMD rules, above, do not apply to owners of Roth IRAs. Prior to the SECURE Act, Roth IRA owners were not required to take RMDs. That provision remains unchanged.
If you have an account with assets in an employer plan, such as a 401(k), 403(b), governmental 457(b), or pension plan, and you are still employed by the company which offers the plan, you may be allowed to delay starting your RMD past your RBD, until after you retire. Check with the plan administrator to determine the RMD rules that apply to the plan.
2. The SECURE Act eliminates the Stretch IRA for most (but not all) non-spouse designated beneficiaries; effective for the beneficiaries of many retirement account owners who pass away after December 31, 2019. Under the new law, most designated beneficiaries (other than a spouse, a minor beneficiary, a disabled or chronically ill beneficiary, beneficiaries with special needs, or a beneficiary within 10 years of age of the IRA owner) must withdraw the entire account balance no later than 10 years after the death of the IRA owner in lieu of the former Stretch option. Under the more favorable Stretch option, the amount of the RMDs and time to draw the account would be measured by the life expectancy of the beneficiary. While this is not a tax increase, the effect of the new 10-year distribution rule is to accelerate the recognition of income, which can result in an adverse tax impact from the much larger distributions over the shorter period of time.
Impact on Roth IRAs:
The new 10-year distribution rules apply to Roth IRAs as well, but the distributions will remain tax-free, except distribution of earnings included in a nonqualified distribution.
Impact on Non-designated Beneficiaries
It appears that the options non-designated beneficiaries, such as an estate, has not changed. Pending clarification from the IRS, it seems that such beneficiaries may still be subject to the 5-year rule if the IRA owner dies before the RBD; and the remaining life expectancy of the decedent if death occurs on or after the RBD. While appears to be the case under the SECURE Act’s amendment to the tax code, the explanation provided by the Joint Committee on Taxation does not go as far.
Potential Impact on Trusts and Your Estate Plan!
Under the new law, certain types of “see-through” trusts that have been created to receive retirement plan assets and take advantage of the Stretch option, may be forced to distribute the plan balance in 10 years; losing certain asset protections and preventing the trusts from doing what they were designed to do. In addition to eliminating the maximum income tax stretch-out benefit, those distributed plan assets could be susceptible to the imprudence of the beneficiary and claims of creditors or divorcing spouses of the beneficiary.
All retirement plan owners are strongly encouraged to review and update their estate plan (including beneficiary designations, wills and trusts) with their estate planning attorney.
3. Traditional IRA Contributions are no longer prohibited for by taxpayers Age 70 ½ and older. The SECURE Act repeals a rule that prohibited contributions to a traditional IRA by taxpayers who are age 70 ½ and older.
4. Part-time workers are now eligible to participate in their employer’s 401(k) plan. The SECURE Act guarantees 401(k) plan eligibility for employees who have worked at least 500 hours per year for at least three consecutive years provided the employee is 21 years of age by the end of the three-year period.
5. Penalty-free withdrawals are permitted if you have a new baby or are about to adopt a child. The SECURE Act allows the employee or IRA participant to take out up to $5,000 following the birth or adoption of a child without paying the usual 10% early withdrawal penalty if taken within one year of the child’s birth or the adoption’s finalization.
6. The SECURE Act requires 401(k) plan administrators to provide an annual “lifetime income disclosure statement” to plan participants.This provision is designed to address the problem of 401(k) plans and IRAs where the employee and participant know how much they have accumulated but have no idea how long the money will last if they were to retire. The disclosures, however, will not be required until one year after the IRS issues final rules and creates model disclosure statements.
The information herein is just an overview of the SECURE Act. Unfortunately, each case will be different, so it is important you contact your financial professional to review your situation and financial plan.
If you have any questions or concerns about your RMD and other IRA rules, including other IRA related changes made by the SECURE Act, please feel free to email Eric@ElmTreeCapital.com or give my office a call at (781) 236-0802.