In December 2019, the president signed into law the Setting Every Community Up for Retirement Enhancement Act, better known as the SECURE Act. As the name suggests, the law is intended to make it easier for American workers to save for their retirement. Let’s examine what the SECURE Act does, and how it might affect your retirement and estate planning.
Prior to the SECURE Act, beneficiaries of inherited IRAs and 401(k)s could “stretch” distributions out over their life expectancy. This had a couple of distinct advantages. Because required minimum distributions (RMDs) were stretched out over a longer time period, perhaps decades, that additional income to the beneficiary was less likely to bump them into a higher tax bracket. In addition, of course, beneficiaries could count on a consistent payment amount year after year.
The SECURE Act has done away with the stretch provision, at least for many people. Under the SECURE Act, if the owner of a 401(k) or IRA dies after January 1, 2020, the beneficiaries who inherit the account may need to withdraw its contents within 10 years after the death of the previous owner.
Note that we said “may need to.” That’s because there are some exceptions. If the inheriting beneficiary is a spouse, minor child, less than ten years younger than the deceased, or qualifies as disabled or chronically ill, they are exempt from the new ten-year rule. Also, if the original account owner died before January 1, 2020, the ten-year rule does not apply, even if distributions to beneficiaries have not yet begun.
If you were planning to leave a lifelong stream of income for your adult children by making them the beneficiaries of your 401(k) or IRA, you may now need to rethink things. If the assets in your retirement accounts are significant, having to withdraw them all within ten years could easily bump your beneficiaries into a higher tax bracket. Making charitable donations from a retirement account could minimize negative tax effects, so speak with your estate planning attorney or financial planner.
If you have an IRA or a 401(k), your retirement advisor has, hopefully, advised you about RMDs, including when you must take them, and how much you must take to avoid penalties. You probably expect to begin taking your first RMD when you turn 70 ½; actually, the requirement was that you had to take your first RMD by April 1 of the year following the year in which you turned 70 ½. So if you turned 70 on August 5, 2019, you would turn 70 ½ in 2020, and would have had to take your first RMD by April 1, 2021.
Congratulations to alert readers who noticed language like “was” and “would have” in that last paragraph. The SECURE Act changed the rules around first RMDs. Under the new law, if you turn 70 ½ this year (2020), you can wait until you are 72 to take your first RMD.
For many people, this makes sense. Fewer people are retiring in their sixties, and many are working well into their seventies. Being able to delay your first RMD means that you can leave your nest egg untouched for a little longer while you don’t need it, leaving the funds for when you do (and for when you may be in a lower tax bracket).
One caveat: if you have already taken your first RMD because you turned 70 ½ in 2019, you may want to keep taking them as you had previously planned. If you took an RMD last year and don’t take one in 2020, there could be negative tax consequences, so speak to your financial professional.
In addition to not having to take RMDs from your IRA as early as you would have in the past, the SECURE Act also gives you an extended window in which to contribute to your traditional IRA. Before the new law took effect, age 70 ½ was the latest you could make contributions.
As of tax year 2020, as long as you are still employed, you can keep contributing to your IRA, no matter what your age. This is a definite advantage to people in their 70s who plan to keep active by working. You have until April 15, 2021 to make your IRA contribution for tax year 2020.
If you own a small business, the SECURE Act may benefit you and your employees. Historically, many small businesses have not offered certain retirement benefits to their employees because it was too costly or cumbersome to do so. The SECURE Act takes measures to address that problem.
As a small business owner who starts a new retirement plan for employees, you may qualify for a tax credit of up to $5,000. If the newly-created plan has automatic enrollment, you can qualify for an additional $500 tax credit.
The amount of the credit for a newly-created retirement plan depends on the number of non-highly compensated employees who gain access to 401(k) plans and others including profit-sharing, SEP, and SIMPLE plans. Employers with 100 employees or fewer over a three-year time span qualify for the tax credit.
These are only a few ways in which the SECURE Act could have an impact on your retirement, financial, and estate planning. It is worth sitting down with your financial advisor or estate planning attorney to discuss the impact this new legislation could have on your plans.
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