Episode 27: The SECURE Act
Welcome to our last podcast of 2019! The hot topic in the retirement planning community is the recent passage of the SECURE act.
So, on today’s episode, I am going to highlight some of the most important changes that will affect retirees moving forward. Make no bones about it! This is the most significant change to our nation's retirement system in more than a decade.
Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. So, unless you’re a client I can’t give you advice because I don’t know you. So, think of this as helpful hints and education only. And please before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser…………. right? that’s just common sense.
(1:10) Practical Planning segment: On December 20th, 2019 President Trump signed into law THE SECURE ACT which stands for SETTING EVERY COMMUNITY UP FOR RETIREMENT ENHANCEMENT ACT.
It was inserted into the federal government spending bill which is so often the case……. right? It puts leverage on the passage of the act because when it's attached to a spending bill…………if it’s not passed, we face another government shutdown.
So, what are the pros and cons of the SECURE ACT?
We are going to highlight the items I think are important to our listeners of the podcast. There are other items in the ACT such as MEP’S (multiple employer plans) and other exceptions for taking funds out of retirement accounts prior to age 59 ½ …………which we will not cover today, maybe we’ll get into those on a future show.
Today we are going to look at 3 major changes in the SECURE ACT. Two of them I think are positive changes and the 3rd one is a big negative for non-spouse beneficiaries.
(4:00) #1 There is no longer an age restriction on Traditional IRA contributions!
In other words, as long as you have EARNED INCOME (same as before) you can contribute to a Traditional IRA after age 70 ½. This was not the case prior to the ACT for a T IRA. It was the case for a ROTH IRA. There was never an age restriction to contribute to a ROTH IRA ……. you just needed to have earned income.
So now the same rule applies to a Traditional IRA!
So again, for tax years after 2019, the secure act repeals the age restriction on contributions to a traditional IRA, so for tax years beginning in 2020 and beyond, you can make contributions after reaching 70 ½
(6:00) Key Point: The deadline for making a contribution for your 2019 tax year in April 15th of 2020, but you cannot make a 2019 contribution if you attained age 70 ½ by December 31st of 2019. Now thanks to the new law, you can contribute for 2020 and beyond…….as long as you have earned income.
(6:45)#2 New RMD start date of age 72!
You know RMDs from IRAs and 401ks are (believe it or not) for some retirees are sometimes unwanted, for lack of a better word. In other words, they wish they did not have to take their RMD because they don’t really need the money at that time.
However, as we all know the government is hungry for the tax revenue that the requirement produces from the millions of retirees that have these plans.
Under the SECURE ACT the starting age for your first RMD is now the year you turn age 72. It was previously the year you turned age 70 ½ ……………which really confused some folks.
Now ………. there was never an RMD for a ROTH IRA and that is still the case for the new law.
Very Important: IF you turned age 70 ½ in 2019 and you have not taken your RMD yet, the old rules still apply to you. You have until April 1st of 2020 to take your first RMD which satisfies your 2019 RMD. You must also still take another RMD prior to year-end of 2020 to satisfy your 2020 RMD
SO again, if you turn 70 ½ in 2019 you must follow the old rules.
The new AGE 72 only applies if you have not already turned 70 ½. I hope that makes sense!
Now for the bad news.
(11:20) #3 The “Stretch IRA” is basically eliminated for Non-spouse beneficiaries
Yes, for all intents and purposes the ability for non-spouse beneficiaries to stretch out distributions over their individual life expectancies for IRA’s has been eliminated.
THE NEW LAW SAYS THE IRA ACCOUNT MUST BE DRAINED WITHIN 10 YEARS AFTER THE ACCOUNT OWNERS DEATH.
There are a few exceptions which we will go over, however, the important point is that prior to the SECURE ACT non-spouse beneficiaries could stretch out IRA distributions from an inherited IRA account over the Life Expectancy.
(13:40) For example, if your rich uncle Bob, left you a 750,000 IRA when you were 40 years old the current LE table according to the IRS says you’ll live another 43.6 years. You must start taking RMDS from the Inherited IRA and using your LE table………… you can stretch those distributions over that 43-yr. period. Your 1st W/D were only amount to 2.3% of the account.
So, most of the IRA account remains invested and continues to grow tax-deferred less your yearly distributions.
Now under the new ACT, the non-spouse beneficiary such as a son, daughter, niece, nephew, friend, etc.………… has to drain the IRA account within a 10-year period after the year of death.
So, what this essentially does is increase the w/d amounts which of course increase the amount of tax revenue the govt collects.
Think about it, the distributions for the beneficiaries are much larger and those distributions get tacked onto their existing income and could potentially greatly increase their tax bracket.
*According to the congressional research service, the new law has the potential to generate about 15.7 billion in additional tax revenue over the next decade.
(16:30) Now some exceptions:
Existing inherited accounts are grandfathered. So, prior to 2020 all existing inherited IRA accounts from Non-spouse beneficiaries are grandfathered under the old rules. Does not affect spouses. You can still leave your IRA to your spouse and as a spouse they can treat the IRA as their own and take RMDs according to their LE Minor children of the deceased owner can inherit the IRA and begin to stretch out the RMD’s. However, when they turn the age of majority in their state, they must then start the 10-year clock A beneficiary who is no more than 10 years younger than the deceased. For example, a sister or brother that is less than 10 years younger that the deceased can use the old rule. A chronically ill beneficiary can use the old rule.
(19:45) Coachable Segment: So, the bottom line is the SECURE ACT has both good and bad news for folks. The new law also includes some other items that we have not covered here……….so make sure you do your research prior to making any irrevocable decisions. Here are a couple of articles below:
I also see some planning opportunities with the new law which I am going to study and explore for 2020.
For example; it may make sense for some that are “legacy inclined” …. meaning it very important to leave a legacy to their children to speed up Roth conversions from a T IRA.
For example; If a child (let’s say age 40) has to withdraw a large IRA within 10 years and it happens to be right in their prime earning years………………. than those w/ds get tacked onto their regular income. This means more of the traditional RA goes to the federal govt and less to the child.
So it may and ( I emphasize may)make sense for the parent to do a series of Roth conversions prior to death to get as much as possible into the Roth IRA at their tax rate rather the much higher tax rate for the child.
Final Disclaimer:
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