On January 1, 2020, the Setting Up Every Community for Retirement Enhancement Act (SECURE Act) went into effect, setting forth nearly 30 new provisions impacting retirement savings and planning. We want to summarize a few of those provisions that have the potential to impact the investment and planning strategies of our clients and friends:
Required Minimum Distribution (RMD) age increased from 70 ½ to 72:
The law extends the date by which individuals must start taking RMDs from their IRAs to 72 from 70 ½. This applies only to individuals turning 70 ½ after December 31, 2019 (no retroactive changes for those already 70 1/2 at year-end). The change was explained to be an easier benchmark age to understand and calculate. In addition, those who are still working after 70 ½ can now contribute to their IRAs after age 70 ½ to the extent they have earned income.
Stretch provision for most non-spouse beneficiaries of IRAs eliminated:
Under the old rules, non-spouse beneficiaries of IRAs (both traditional and Roth IRAs) were eligible to re-calculate RMDs based on their own life expectancy not that of the original IRA holder. In other words, a 50-year-old son or daughter who inherits their 80-year-old parent’s IRA could take a lower RMD amount than their parent had, based on the 50-year-old’s longer life expectancy. In the new law, that “stretch” provision is eliminated and replaced with a fixed, ten-year time period under which the entire inherited IRA balance must be distributed. The potential tax impact on the non-spouse beneficiary is enormous. Imagine a $1 million inherited IRA that previously could be distributed over the 30-35-year life expectancy of that 50-year old, now must be distributed fully over just 10 years, though there is flexibility in whether those distributions are taken evenly over the ten years or all towards the end of the period. As always, all distributions are taxed as ordinary income.
Exceptions to this provision are made for beneficiaries who are surviving spouses, minors, disabled, or chronically ill, among other exceptions. One strategy that may alleviate some of the increased future tax burden on heirs is to consider converting a traditional IRA to a Roth IRA, depending on your individual tax situation. Please consult your advisor.
Annuities may be added to 401k plans:
Despite this change, we would not advocate or recommend to our clients the purchase of an annuity in a 401k plan. Annuities typically carry high fees and low returns. Furthermore, there is no tax benefit to holding an annuity inside a 401k because a 401k plan is already a tax-deferred savings vehicle. It may also be difficult to pass 401k assets to beneficiaries if they have been annuitized. Please consult your advisor before making an annuity election in your 401k plan.
Qualified Charitable Contributions with IRA Distributions:
The provision that allows up to $100,000 of an individual’s RMD to be made as a direct qualified charitable contribution to avoid taxation of that IRA distribution is largely unchanged.
Please contact us if you have any questions about the SECURE Act and its impact on your investment strategy or financial plan. Please also consult your estate planning and tax professionals to review the impact on your estate and tax plans.
We hope you have found this helpful.
Edgemoor Investment Advisors Team
