Navigating the SECURE Act

WHAT IS THE SECURE ACT?

The Setting Every Community Up for Retirement Enhancement Act (The SECURE Act) was part of the most recent $1.4 trillion year-end spending bill, approved by the Senate on Dec 19^th, 2019, and subsequently signed into law by President Donald Trump. The act was part of an end-of-year appropriations bill and accompanied by provisions that impacted the nation’s retirement system. The goal of these provisions is to provide additional opportunities for Americans to save in order to strengthen their retirement base. 

The SECURE Act contains significant changes to retirement plans; you will find additional information on the following key areas that impact individuals below:

• Removal of the IRA contribution restriction after age 70 ½
• Changing of Required Minimum Distribution period from age 70 ½ to age 72
• Eliminating “stretch” provision for most non-spouse beneficiaries which includes potentially negative impacts for individuals who have named their trust as a beneficiary or contingent beneficiary

CONTRIBUTION CHANGES

• The restriction that prohibited contributions to an IRA beyond 70 ½ years of age has been lifted
  • Qualifiers:
    • The individual contributing must be earning income to contribute
    • If a spouse is still working, the non-working spouse may contribute under the spousal IRA rules 
• Under the new rule any Qualified Charitable Distributions (QCD)  will be reduced by the cumulative amount of deductible Traditional IRA contributions made after reaching 70 ½ years of age
   
  1. Example: John turns 70 ½ in 2020, but is still working part-time, earning $20,000 per year. In order to minimize his taxable income, John makes a $7,000 (including his over-age-50 catch-up) deductible contribution to his Traditional IRA. He continues to do the same for three more years (for a total of $28,000 of post-70 ½ Deductible Traditional IRA contributions), at which point he retires.
     
      In 2027, John has an unusually large charitable streak and decides to make a $30,000 QCD, his first such distribution, to charity. Despite following all the QCD rules, John will ‘only’ be entitled to claim a QCD of $30,000 – $28,000 = $2,000. The remaining $28,000 given to charity can be claimed as an itemized deduction.

REQUIRED MINIMUM DISTRIBUTION CHANGES

• Required Minimum Distributions (RMDs) now begin at age 72 (compared to the old rule of 70 ½) and the first year distribution may be delayed until April 1^st of the year following your 72^nd birthday
• Impacts individuals who were not 70 ½ years old by 12/31/2019 (birth-date after June 30^th, 1949)
• Qualified Charitable Distributions can still be made beginning after you become age 70 ½ years
  • Beginning in the year an individual turns 72, any amounts given to charity via a QCD will reduce the necessary RMD as well
• The rule also includes updates to the life expectancy tables in order to account for individuals living longer, the updated tables are expected to be released later this year
• The rule change creates many planning opportunities such was when you should start taking your distributions. 

Each situation is unique and should be discussed in detail with an advisor, accountant or legal counsel prior to implementation
 

REMOVAL OF THE “STRETCH” PROVISION

What was the “Stretch” provision?

Under the rules prior to the passing of the SECURE Act, when the holder of an IRA passed away the beneficiaries were able spread (or stretch) the required distributions from the inherited IRA over their lifetime. The SECURE Act removed the “Stretch” provision and replaced it with a 10 year required distribution period (summarized in the following section).

Impact of the “Stretch” provision removal

• Reduction of the time period an inherited IRA can grow tax-deferred for the beneficiary will have a financial impact
• More significant though is the impact this rule has on IRAs that have named a trust as the primary or contingent beneficiary, this could create a large tax liability for heirs
  
• There are two things to look for in your trust document with a legal professional:
  • 1) Does your trust contain a provision that only allows your beneficiary to collect the RMD from the trust each year?
    • Under the new 10 year rule, instead of an annual RMD the account is only required to be completely distributed within 10 years, so if your trust document is worded to only allow the beneficiary to collect the RMD each year, it would lead to the beneficiary not receiving payments for years 1-9, instead receiving all of the funds in year 10, thus leading to a very large tax bill.
  • 2) Does your trust require that all or a substantial amount of the retirement account distributions remain in the trust?
    • This also could carry large tax consequences since the funds retained in the trust are subject to the highest tax bracket of 37% 

***Please consult a legal professional regarding the language in your trust***

Summary of SECURE ACT Changes

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