On Friday, December 20, 2019, President Trump signed legislation to fund the federal government through September 30, 2020. This legislation contained provisions from the SECURE Act (Setting Every Community Up for Retirement Enhancement Act). The new law is mainly intended to expand opportunities for individuals to increase their retirement savings; however, some important changes are affecting Individual Retirement Accounts (IRAs) that have turned traditional estate planning on its head.
The SECURE Act increases the required minimum distribution (RMD) age to 72. So, if you turn 70 ½ in 2020 or later, you won’t need to start taking RMDs until age 72. One drawback buried in the legislation greatly limits the use of “Stretch IRAs” by requiring the owner’s entire interest in the IRA be distributed to its designated beneficiary within 10 years after the death of the owner, whether or not distributions have begun. Before the SECURE Act, RMD rules allowed non-spouse beneficiaries to draw down an inherited IRA over the beneficiary’s IRS defined life expectancy.
There are exceptions in the SECURE Act for eligible beneficiaries that allow distributions over the life or life expectancy of the beneficiary. Eligible beneficiaries include (1) surviving spouses, (2) minor children, and (3) disabled and chronically ill beneficiaries.
The SECURE Act repeals the maximum age for traditional IRA contributions for contributions made for taxable years beginning after December 31, 2019. Previously, you could not make traditional IRA contributions for the year during or after reaching 70 ½. There’s no age restriction on Roth IRA contributions, and the SECURE Act does not change that. There is one side effect of this new provision that affects qualified charitable distributions (QCDs). Once reaching 70 ½, you can make QCDs of up to $100,000 annually directly from your IRA. The $100,000 qualified charitable distributions limit will be reduced by the aggregate amount of deductible IRA contributions made for the year you reach 70 ½ and later years.
There are a few more advantageous distribution options from qualified plans available through the provisions of the SECURE Act. Up to $10,000 in aggregate distributions of 529 plans can be used for qualified education loan repayment (student loans) with separate accounting for siblings. For example, in a family with two children that have student loan debt, up to $20,000 could be withdrawn from 529 plans to pay down those loans. The deduction for student loan interest is reduced by distributions for the loans that are treated as qualified higher education expenses. There is also an exception to the 10% early withdrawal tax for distributions from an IRA or 401(k) related to qualified birth or adoption expenses. Each parent can withdraw up to $5,000 during the 1-year period beginning on the date when the individual’s child is born, or on which the legal adoption of an eligible adoptee is finalized.
Small business owners with 100 or fewer employees may now receive up to $5,000 for starting a retirement plan. The new law provides a start-up retirement plan credit of $250 per non-highly compensated employee eligible to participate in a workplace retirement plan at work. This credit applies to SEP, Simple, 401(k), and profit sharing types of plans. If the retirement plan includes automatic enrollment, an additional credit of up to $500 is now eligible.
Work with your HORNE tax advisor to help clarify your personal and financial goals for both your retirement and estate plan. Your planning strategies should be reviewed and updated for changes in the tax law, familial relationships, and your personal circumstances. Your HORNE team is here to help you navigate those evolving needs and changes.