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On December 20, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law. Its purpose is to encourage retirement savings, address certain issues concerning education, and provide tax relief for children with unearned income among other matters. The most important issues for our clients surround changes in IRAs, and particularly their impact on inherited IRAs.
Perhaps the most impactful change the SECURE Act makes is to effectively eliminate stretch IRAs for non-spouse beneficiaries, forcing them to drain IRAs within 10 years instead of over their IRS-defined life expectancies. There are exceptions; for example, as when a beneficiary is disabled or chronically ill, less than 10 years younger than the deceased owner, or while a minor is under 18.
The new restrictions on stretch IRAs illustrate the need for careful tax planning for distributions, especially for anyone with a large IRA balance who is interested in leaving an inheritance to their children.
Conduit trust arrangements for inherited IRAs will need to be closely examined and potentially reworked to address the new law. Other planning strategies include careful withdrawal planning and beneficiary tax bracket management. In certain circumstances, decreasing Traditional IRA balances in favor of Roth IRAs could result in significant tax savings for beneficiaries, assuming these changes stay in place.
Below are some of the numerous other changes also enacted:
The Required Minimum Distribution (RMD) age is moved to 72 from 70 ½. If you did not turn 70 ½ by December 31, 2019, then you do not have to take RMDs until you are 72.
Going forward, you may make contributions to your IRA beyond 70 ½, provide you have earned income. Previously there were no age restrictions on ROTH IRAs, and this did not change.
The birth or adoption of a child allows for $5,000 penalty free withdrawal in the same year.
The new act requires a disclosure for an estimate of “lifetime annual income” that can be generated from portfolio assets and makes it easier to purchase annuities within 401(k) plans. Annuities can be appropriate for some, but the all-in costs, often reaching 2%-3% per annum, can be high compared to broadly-diversified low-cost investment options.
Part-time employees now have access to 401(k) plans. Employees who work 500+ hours per year for three consecutive years can now participate in 401(k)s. The tax credit for start-up cost associated with small business retirement plans “changes the flat dollar amount to be the greater of (1) $500 or (2) $250 times the number of non-highly compensated employees, capped at $5,000”. Going forward the credit will be the lesser of the flat dollar amount or 50% of the cost. (Congressional Research Office, 12/20/19)
Educational changes include a new provision allowing for repayment of a student’s debt (or that of a sibling) up to $10,000 penalty-free from 529 accounts. Additionally, certain taxable non-tuition fellowship and stipend payments will be treated as compensation for purposes of contributing to IRAs.
Changes also include tax relief for children with unearned Income. This provision reverses a tax, generally at their parents’ higher rates, on unearned income for children via trusts and estates.
We continue to evaluate many of these changes and will be reaching out to clients about the potential impact on their plans. In the meantime, let us know if you have questions or concerns about your personal situation and how we can best help you.
Warm regards,
Ben
Contact us at 865-584-1850 or info@proffittgoodson.com