How the SECURE Act Will Impact Your Retirement
On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The act became effective on January 1, 2020. With 30 provisions included in the SECURE Act, this new law does several things that could affect your plan for retirement.
We’ve spent the last several weeks analyzing these changes, and within this article, you’ll find a breakdown of how the law could impact your wealth management strategy. If you have any questions about what’s covered within this article, we invite you to connect with your team at Cornerstone Wealth.
The “stretch” IRA has been eliminated
The “Stretch” provision for non-spouse beneficiaries of inherited IRAs (and other retirement accounts) was eliminated. Upon the death of the IRA owner or defined contribution plan participant, individual beneficiaries are now required to draw down his or her entire balance within 10 years, regardless of whether or not RMDs started before the owner/participants’ death. Important to note, the rule does not apply to “eligible designated beneficiary,” defined as one of the following:
- the surviving spouse
- a child under the age of maturity
- someone who is disabled or chronically ill
- any other person who is not more than 10 years younger than the participant/IRA owner
RMD timing has changed
Historically, you were required to start taking Required Minimum Distributions (RMDs) from an IRA at age 70 ½. The SECURE act has extended this by 18 months, now requiring RMDs to begin at age 72. Additionally, the 70 ½ contribution age limit was removed. This means that if you are over the age of 70 ½ and are still working, you can now make tax-deferred contributions to an IRA.
Retirement funds can go towards birth or adoption costs
You may now take penalty-free withdrawals from your retirement account for birth or adoption costs. The limit is $5,000 per child, per spouse. This means that a husband and wife could each withdraw $5,000 after the birth of their child, for a total of $10,000.
Additionally, these qualified distributions are exempt from 10% early distribution and mandatory 20% withholding, and this could be repaid to certain IRAs and retirement plans without regard to the standard 60-day limit.
Some student loan costs are now “qualified expenses” for 529 plans
Moving forward, up to $10,000 can be used to pay a beneficiary’s principal and interest on qualified education loans. An additional $10,000 can be used to pay qualified education loans for each of the 529 plan beneficiary’s siblings. This change is retroactive, going back to January of 2019.
The formula for the Kiddie Tax has changed
The SECURE Act has also modified the Kiddie Tax. This tax is now calculated as it was in 2016, before the Tax Cut and Jobs Act (TCJA) made changes to the calculation. Going forward, the formula for determining your child’s taxable income is the following:
child’s taxable income = child’s net earned income + child’s net unearned income –child’s standard deduction
Key planning review items
The SECURE Act has broad implications for retirement planning, but there are five key planning items that are especially important to address now.
❏ Review beneficiaries
Take time to review all beneficiary designations and make sure they still match up with your financial goals. If your goal was to give lifetime income to a child, consider a charitable remainder trust with the child as the lifetime income beneficiary.
❏ Review trusts that are designated beneficiaries
Most “pass-through” state beneficiaries will only have access to RMDs. However, with the new provisions, there are no RMDs until year 10 after. After year 10, the entire account will be distributed, causing a taxable event.
❏ Detailed tax planning reviews
The SECURE Act is positioned to be a tax generator for the federal government, so now is the time to closely review wealth transfer and legacy plans in detail. In some cases, it may make sense to give IRAs to charity and purchase life insurance to transfer wealth to heirs.
❏ Roth conversions
RMDS are not required for Roth IRA owners. However, beneficiaries of Roth IRAs are subject to RMDs, and when funds are distributed from an inherited Roth IRA the distribution is typically not taxable. With the recent tax cuts from the TCJA, it may make sense to convert IRAs to Roth IRAs with lower tax rates.
❏ Review RMD planning
With the RMD age being pushed from 70½ to 72, it may be worthwhile to look at Roth conversions or qualified charitable contributions as a way to reduce your tax liability.
Final Thoughts
By many estimates, the SECURE Act was the largest change to retirement planning in nearly
a decade. If you have questions about how your retirement plan should shift with these
changes, we invite you to connect with our team.
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Investment advisory services offered through Cornerstone Wealth Group, LLC dba Cornerstone
Wealth, an SEC-registered investment adviser. This material provided by Cornerstone Wealth
Group is for informational purposes only. It is not intended to serve as personalized investment
advice or as a recommendation or solicitation of any particular security, strategy or investment.
Cornerstone Wealth is neither an attorney nor an accountant, and no portion of this information
should be interpreted as legal, accounting or tax advice. Please contact your tax and financial
advisors to discuss your specific situation.
