In the final days leading up to Christmas, while most of us have been buying presents, baking cookies, and mentally preparing to spend time with our in-laws, Congress has been busy. The recent passage of the SECURE Act has some major implications for retirement and financial planning. We've included some of the most important changes below. Should you have any questions or concerns, please do not hesitate to reach out to us.
- Increase in Age for Required Minimum Distributions (RMDs): 72 is now the age when investors are required to take withdrawals from their IRA. This change applies to individuals who will attain the age of 70 ½ in calendar year 2020 (if you turned 70 ½ in 2019, the old RMD rules apply and you will need to begin taking your distributions each year). You can still make penalty-free withdrawals prior to age 72 as long as you are at least 59 ½ years old. Also, Qualified Charitable Donations (QCDs) can still be made once turning 70 ½.
- The Death of the Stretch IRA: previously distributions from an inherited IRA (Traditional and Roth) could be taken over the lifetime of the beneficiary. Now distributions must be taken over 10 years. No minimum distributions are required, but the account must be zeroed out within 10 years of the date of death. This may have significant tax implications for beneficiaries depending on the timing of their withdrawals. Surviving spouses, minor children and the disabled/chronically ill are excluded from this provision. Existing inherited IRAs are subject to the old rules, and this will effect inherited IRAs after January 1, 2020. Congress expects this change to generate $15.7B over 10 years in additional tax revenue.
- Removal of contribution age limit of 70 ½ : For those working into their 70s, you can now contribute to an IRA, as there is no age restriction on contributions. This change may increase the use of Roth Conversions during low income years, prior to their RMD year. We discussed this technique in our annual financial planning letter earlier this month.
- Qualified birth or adoption distributions: The Act allows for penalty free withdrawals up to $5,000 (per-parent and per-child) from an IRA/401K/403B for expenses related to the birth or adoption of a child.
- Qualified Education Loan Repayments: a lifetime amount of $10,000 from 529 plans may be used to pay the principal and/or interest of qualified education loans. The $10,000 lifetime limit is a per-person limit; however if the 529 plan has additional assets in the fund and the beneficiary has siblings, an additional $10,000 may be distributed and used to pay down student debt for each sibling as well. This change is retroactive to the beginning of 2019.
- Qualified Disaster Distributions - can be made from retirement accounts for up to $100,000 per disaster event for those who have principal residences in a Federally declared disaster area and who suffered an economic loss as a result of that disaster. This is retroactive to disasters that occurred on or after January 1, 2018. Going forward, distributions must be made after the date of the disaster, they are not subject to 10% early distribution penalties, exempt from mandatory withholding requirements, and from a tax perspective they are treated as distributed evenly over a 3-year period (for example, taking the max $100,000 distribution in year one would only create $33,333 of additional taxable income in year one, with the same amount applying to years two and three). The amount taken may also be repaid within three years of receiving the distribution.