Note: This article was updated on 02/13/2020 to account for January 2020 legislation changes and more current information.
What is the SECURE Act?
This new bill eliminates a huge benefit for many workers.
By an overwhelming majority, the House just passed a bill which affects the ability of contributions to typical retirement plans – 401(k), 403(b), and IRAs. While seeking to allow employers to expand those who can contribute to retirement plans, increase the age for RMDs to 70 ½, and allow those over 70 ½ to contribute to traditional IRAs, the cost for this ‘benefit’ is eliminating the ‘stretch out’.
How does the SECURE Act affect you?
Principal elements of the Act include:
- For those who reach 70 ½ after December 31, 2019, minimum distributions from IRAs and retirement plans may be postponed until age 72.
- $5,000 may be withdrawn from IRAs and retirement plans without penalty (but with tax) to pay the costs of the birth or adoption of a child.
- There will be no age limit for contributions to IRAs, which were formerly prohibited after age 70 ½.
- Part-time workers will be eligible to participate, if they work over 500 hours in three consecutive years.
- Plans that have automatic enrollment and escalation provisions for contributions will be increased from 10% to 15%.
- Amounts paid as stipends for academic or postdoctoral studies will now be included in the definition of compensations for making IRA contributions.
- Section 529 college savings plans can pay for the cost of apprenticeships and up to $10,000 of those assets can pay for student debts.
The above changes do come at a cost. Under prior law, the ‘stretch out’ provisions allowed someone who inherits an IRA to take the distributions over their life expectancy, thereby lowering the income tax to be paid. In the typical situation, Mom leaves her IRA to her son and, without the ‘stretch out’, he would have to pay tax on the whole thing in one year. Under the prior rules, he could take minimum payments according to a schedule over his life expectancy which lowers the tax he has to pay, while the remaining funds were growing tax deferred in the retirement plan. The so-called SECURE Act would make anyone other than a surviving spouse take the payments over no more than 10 years. This would mean that if you inherit a $1,000,000 IRA, you would have to include $100,000 additional income each year on your tax return, pushing you into a higher bracket.
This threatens not only individual beneficiaries, but also trusts that are named as beneficiaries of retirement plans. The change in the law means that additional planning may be needed to protect retirement plan assets. This could mean using vehicles like ROTH conversions, allocating assets among a class of beneficiaries, and charitable trusts that give similar benefits as under prior law.
What can you do NOW to protect your assets?
Based on the above, now is the time to review your planning to make sure you are poised to make any changes before they negatively affect you. If you are interested in learning more, call our office for a planning review today! 847-347-6406