The SECURE (Setting Every Community Up For Retirement Enhancement) Act became law on December 20, 2019.
Since then, people have been asking, “What do these changes about IRAs and retirement accounts mean for me?” *Disclaimer – The below is not tax advice and should not be relied on to avoid tax penalties. Make an appointment with your CPA, CFP or tax attorney for advice specific to your situation.*
If you fit one or more of the below 7 descriptions, then you might have a reason to make some changes in your financial plan from the SECURE Act.
(In the descriptions, “retirement account” refers to IRAs, SEP-IRAs, 401Ks, 403Bs, SIMPLE-IRAs or other qualified retirement accounts. It does not refer to Roth IRAs.)
1. You have a fairly large retirement account that you don’t need. You are planning on leaving the bulk of it to your kid(s).
If this is you, there may have been very little discussion in the past with your financial planner, CPA or estate planning attorney about it. That’s because, before the SECURE Act, when younger people inherited a retirement account, their required minimum distributions (RMDs) from that IRA were based on their remaining life expectancy. This would make their RMDs relatively small. So, tax-wise, leaving a retirement account to a younger person made sense. There wasn’t much to discuss.
But now, when your kid(s) inherit the account, they must take the entire balance over 10 years. This could be a significantly different tax story, especially if your kids are in high tax brackets themselves.
Example with a $2,000,000 IRA and 2 kids in their late 40s:
Each kid inherits $1,000,000 ($2,000,000/2). Their old RMD would have been – very rough guess – about $35,000 each in the first year. Under the SECURE Act, each kid must take their entire inheritance within 10 years. Whether they take 1/10 each year, or some other schedule, this could make a giant difference in the portion of their inheritance shared with Uncle Sam.
The point is, leaving a large retirement account to the kids isn’t a tax no-brainer anymore. It might make sense to look at the tax impact of all of your assets, spend down the IRA faster, perhaps convert all or part of it to a Roth, and leave the kids something more tax-friendly. Many planning professionals should be addressing this topic in 2020 and beyond.
2. Your estate planning attorney, CPA, or tax attorney advised you to name your trust as a primary or contingent beneficiary of your retirement account(s).
With the change in the distribution rules, this advice may change. It’s important to check in and ask them.
3. You are part of or own a small business that does not have a retirement plan because it’s a ton of paperwork.
There is now an expanded tax credit for small businesses to set up a retirement plan. If you haven’t set one up or your employer hasn’t, there are new incentives to go through the paperwork (which actually isn’t that hard if you pick the right place to do it). And, the employer has until filing date, doesn’t have to be done by Dec. 31 anymore (like SEP IRAs).
4. You are not yet 70. Your current financial plan assumes RMDs when you turn 70 1/2. You don’t necessarily need your RMDs to have enough cash to live on.
After the SECURE Act, now you don’t have to take your RMDs until you are 72. So your current plan is overstating how much income you will report from ages 70 1/2 – 72.
The flip side is, when you turn 72, your RMDs could be bigger. So your plan also is potentially understating your RMDs, and how much you will report in income, from age 72 onward.
If this is you, and either it’s been a while since you updated your plan, or you are close to 70, it might make sense to schedule a review. That might include a what-if scenario with a Roth conversion before you turn 72.
5. You are over 70 1/2. You have been sending part or all of your IRA’s RMDs direct to charities to avoid income tax on the RMD. You are confused now whether you can still do this.
Yes, you can. Making Qualified Charitable Distributions (QCDs) directly from IRAs is now one of the best ways for anyone over 70 1/2 to reclaim a deduction (charitable contributions) that you might have lost after the 2017 Tax Act.
If you are over 70 1/2 and have an IRA, but have been making out checks to charities from your bank account, you may have missed a tax savings opportunity by not using QCDs instead. Talk to your professionals.
6. You are under 70 1/2 but planned on sending part or all of your IRA’s RMDs direct to charities to avoid income tax on the RMD. Since you don’t have RMDs until 72, you are confused now whether you can still do this.
Yes, you can. Even though you won’t have an RMD until you turn 72, you can still start making QCDs after you turn 70 1/2.
7. You are close to 70 1/2 years old, still earning income and contributing to an IRA.
Before the SECURE Act, you had to stop contributing to your IRA at age 70 1/2. Now you can continue contributing as long as you have earned income.
8. You are in your 70s, 80s or 90s, still earning income (rock on!), and wanted to keep contributing to your IRA but had to quit way back when you turned 70 1/2.
Now you can start contributing and getting the deduction again! Woo-hoo!
If none of the above fits, the SECURE Act’s retirement account news probably won’t have a huge effect on your retirement plan. Carry on, resume your life, and ignore the headlines about it!