In the waning days of 2019, stuffed inside a must-pass continuing spending resolution required to keep the government running, Congress passed, and the President signed, one of the most material pieces of retirement legislation of the past twenty years.
The new law called the Secure Act will impact the vast majority of American retirees and has some important provisions to understand. Some of the new provisions are perceived by me as a positive and some will probably not make most retirees happy. Let’s go through a few.
First some good, the nature of retirement is changing and many Americans are still earning money into their 70’s and beyond. The Secure Act extends the age of eligibility for IRA contributions. This means as long as you are working and earning income you can contribute to a Traditional IRA regardless of age. Previously IRA contributions were only allowed until the year someone turned 70 ½. The new rule makes Traditional IRA rules consistent with those for Roth IRAs and 401(k).
More good news also concerns Required Minimum Distributions or RMDs. As a quick refresher, the IRS had required individuals to take a taxable withdrawal from their IRAs, 401(k)s, and 403(b)s starting at the age of 70 ½. The amount of the withdrawal is based on the account owner's age and account balance.
The Secure Act extends the age of RMD from 70 ½ to age 72. I think many retirees and pre-retirees will find this attractive because as stated above, more Americans are extending their working years and this extension provides a bit more tax control over this issue. Also, by changing the age from a half year (70 ½) to a whole year (72), I think it will clear up a bit of confusion some people have had regarding the RMD process. Oh, and as heads up, if you turned 70 ½ in 2019 you will still need to take your 2019 RMD as originally planned and you have until April 15th, 2020 to process this withdrawal.
In another positive note, for those IRA owners who were using the Qualified Charitable Distribution or QCD, the government is not changing the year of eligibility for this type of distribution, which remains 70 1/2. A QCD enables IRA owners to distribute money directly from their IRA to a qualified charity without including the amount in their taxable income, the QCD is a tax tool we are using more and more in our practice nowadays and I was glad to see this rule was kept intact.
Now for some news that is likely to irritate some. The Secure Act ends the practice commonly called the Stretch IRA. Previously, if an IRA or 401(k), was left to a non-spouse beneficiary, the beneficiary could "stretch" distributions and therefore tax payments out over the beneficiary’s life expectancy. This commonly used tax tool enabled IRA beneficiaries to continue to defer taxes on IRA funds sometimes for decades.
The new rule, which applies to IRAs inherited from original owners who have passed away on or after January 1, 2020, requires most beneficiaries to distribute, and be taxed on, the entire balance of an IRA within 10 years of the death of the original IRA owner. Unfortunately for those families that have used a stretch IRA trust in their estate planning, the Secure Act removes much of the purpose for this type of planning. Fortunately, there are a few exceptions to the new rule which includes surviving spouses, minor children of the IRA owner, disabled or chronically ill beneficiaries, and beneficiaries who are less than 10 years younger than the original IRA owner or 401(k) participant.
So, if this leaves you less than enthusiastic about the new law, I will finish with one more long-overdue positive. 529 plan balances can now be used to pay off student loans up to $10,000 and still receive positive tax treatment. To me, this fix was obvious and I’m sure will good news to many families and graduates
Opinions are solely the writer's and are for general information only is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Neither Oak Partners or LPL offers tax advice. Contact Marc at firstname.lastname@example.org. Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.