New Year, New Laws

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Matt Raines
January 23, 2020
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With the turn of the calendar to a new year, change comes through several lenses, such as new personal aspirations of eating healthier or getting more sleep, or by way of professional or career goals. For the government, this change comes via new regulations and laws.

Embedded in the $1.4 trillion spending package that went into effect on January 1, 2020, are provisions for the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which is designed to expand opportunities for individuals to increase their retirement savings. The SECURE Act passed through the U.S. House of Representatives in May 2019 with overwhelming bi-partisan support. It then made its way over to the Senate, where it was eventually added to the government spending package that was passed and signed into law. With the legislation now in effect, we’re revisiting our July 2019 blog post about the SECURE Act to highlight the key changes which are most likely to affect clients.

No “Stretch”-ing Allowed

As financial publications and media outlets report on these changes, a key provision that is frequently highlighted is the elimination of the “stretch” provision for non-spouse beneficiaries of inherited IRAs and other retirement accounts. This provision previously allowed beneficiaries to “stretch” or gradually distribute the account balance over their IRS-defined life expectancy.

The SECURE Act’s new provision requires beneficiaries to drain the inherited accounts within ten years of the account owner’s death. This change has implications for both younger beneficiaries and beneficiaries of accounts with large balances, as they will see 1) an acceleration in the tax due on the account, and 2) minimization of the tax-deferred growth within the account. An important note is that accounts inherited from owners who passed away before 2020 will remain unaffected and can adhere to the old provisions.

IRA Contributions and Required Minimum Distributions

The new legislation allows for contributions to be made into a traditional IRA after age 70 ½, which was previously restricted. The 2020 contribution limit is $6,000 ($7,000 if you are over the age of 50). The contribution deadline for tax year 2019 is April 15, 2020, but you cannot contribute if you were age 70 1/2 or older as of December 31, 2019. However, with the new law, you can make contributions for tax year 2020 and onward.

This new provision also delays the age at which you must begin taking IRA required minimum distributions (RMDs) to 72 (up from 70 ½). The law still allows an individual, however, to make a qualified charitable distribution (QCD) from their IRA starting at age 70 ½. The aforementioned changes do not affect IRA owners who are currently taking RMDs from their accounts; rather, this provision applies to anyone turning 70 ½ in 2020 or later.

It’s All About the Kids: 529 Plans and “Kiddie Tax” Changes

The Tax Cuts and Jobs Act (TCJA) of 2017 allowed 529 plans to be used for annual K-12 expenses, up to $10,000. The SECURE Act expands the list of qualified expenses to include apprenticeship program expenses and distribution for qualified education loan repayments. This provision allows 529 plan distributions to be applied to the principal and interest of qualified education loans up to $10,000.

Also included in the TCJA was a change to the so-called “Kiddie Tax,” which is a tax on the unearned income of certain children. The 2017 TCJA included a provision that made this unearned income subject to trust tax rates instead of the child’s parents’ marginal tax rate—the passage of the SECURE Act has resolved this issue for tax years beginning in 2020, with the option to use the new rates for 2019 and amend 2018.

In light of the SECURE Act’s passage, below are recommended steps for financial planning:

  1. Review your beneficiaries. On an annual basis, we recommend reviewing the beneficiaries listed on your accounts to ensure they are accurate. Additionally, knowing which of your accounts have non-spousal beneficiaries associated with them can be helpful for estate and tax planning purposes.
  2. Review your trust(s). With the SECURE Act’s elimination of the stretch IRA, it could be more advantageous for both estate and tax planning purposes to utilize charitable trusts and/or life insurance trusts.
  3. Consider Roth IRA conversions. Some individuals may benefit from converting a portion of their traditional IRA to a Roth IRA. Roth IRAs are now subject to the same ten-year distribution rule mentioned above; however, a Roth IRA conversion will reduce the balance in your traditional IRA, thus decreasing your beneficiaries’ tax liability. Under the SECURE Act, completing (and paying taxes on) a series of Roth IRA conversions over a period of years could be more advantageous than your heirs having to pay income taxes on the accelerated distributions.

Please contact a member of the Relationship Management team to discuss any of the above—or additional 401(k) and ERISA retirement account provisions—in more detail.

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