The SECURE Act

With the passing of the SECURE (“Setting Every Community Up for Retirement Enhancement”) Act, which became effective January 1, 2020, we wanted to take the opportunity to provide you with key points in the legislation that may affect you, your family, and your financial plan.

Over the course of 2020, we will evaluate how the new stipulations under the SECURE Act affect your specific financial situation. For some, the changes may affect you more immediately, for others, changes will be felt further down the road. We will work with you to be proactive in identifying changes in your financial strategy as well as applicable planning opportunities.

Required Minimum Distribution Age: Previously 70 1/2 Now 72
What does this mean?

The government allows for tax-deductible contributions and tax-free investment growth in retirement accounts, in order to help save for a successful future. However, as we know, there is no such thing as a free lunch. Prior to the passing of the SECURE Act, the government required you to begin distributions from your retirement account at 70 1/2. The required minimum distribution (RMD) is an amount the government requires you to withdraw from your IRA each year based on age and account value, which is taxed at ordinary income levels.

The new legislation has delayed RMDs from retirement accounts until the owners of the account turns 72. Note, the IRA has not yet updated its Uniform Lifetime Distribution Table, which calculates one’s RMD each year. There are proposed revisions taking place in 2021, taking into effect longer life expectancies, which could theoretically reduce RMD amounts each year.

What should we be thinking about?

For those approaching 70 1/2 you have additional time until your RMDs begin. This extension provides potential opportunity, for additional years, to perform a ROTH IRA conversion strategy prior to beginning required minimum distributions or planning for Qualified Charitable Distributions (QCDs).

Reminder: if you turned 70 1/2 in 2019, this change does not apply to you.

We will also be monitoring any updates the IRS provides on the Uniform Lifetime Distribution Table which may affect your RMD amount and, therefore, your taxable income.

Elimination of “Stretch” Option for Inherited IRAs
What does this mean?

Prior to the passing of the SECURE Act, beneficiaries of inherited individual retirement accounts (IRAs) had the option to “stretch” the RMD amounts over their lifetime. Assets inherited from an IRA in 2020 and beyond will no longer have the ability to stretch RMDs over a beneficiary’s lifetime.

Inherited IRA assets must now be distributed over a 10-year period, which has the potential to significantly increase the annual RMD amount to a beneficiary. While IRA distributions are taxed as ordinary income, this change would also increase the amount of annual tax due on the distributions.

We do note there are some exceptions to the elimination of the stretch option including but not limited to the disability of beneficiary and if the beneficiary is a minor.

What if I already have inherited an IRA prior to 2020?

The good news is if you already have inherited an IRA and are using the option to stretch RMDs over your lifetime, you are grandfathered in and the elimination of this option under the new legislation does not affect you.

What should we be thinking about?

We will want to review beneficiary designations on your retirement plans. If your trust is a beneficiary, we may perhaps reassess if this is still the optimal strategy.

Those with high balances in their traditional or rollover IRA accounts may want to consider a ROTH IRA conversion strategy to pay the tax up front; this will help to reduce the tax burden on beneficiaries, as ROTH IRA distributions are tax-free. This is especially relevant given the lower tax rates from the TCJA, effective until 2026.

If you are currently making retirement plan contributions, ROTH contributions may be a more effective retirement and estate planning strategy.

Ability to Make Contributions Beyond 70 1/2
What does this mean?

Under the new rules of the SECURE Act, people who are 70 1/2 years old, and have taxable wages are still able to make contributions to their IRA. Previous to the passing of the new legislation, workers were capped on their IRA contributions once they attained the age of 70 1/2.

What should we be thinking about?

It may make sense to continue IRA contributions past 70 1/2 years old, but should be in conjunction with your financial plan and goals. Again, this change is only applicable to people who have taxable wages.

Conclusion

We hope this provides you a high-level, general overview of the SECURE Act changes and effects. Realizing every family’s situation is different, we will personally guide you through these changes and how they affect your specific situaiton.

Given the various fundamentals that inspired the passing of the SECURE Act, we anticipate more legislation and changes, similar to the SECURE Act, over the next decade. While these changes are impossible to predict, our goal is to absorb, evaluate, and effectively communicate the information to you and your family while continuing to be proactive with planning opportunities in the current landscape for both now and in the future.

We look forward to being in touch with you regarding the information of the SECURE Act and how it pertains to your family’s financial planning. As always, if you have any immediate questions, please do not hesitate to reach out.

-The Corbenic Advisory Team

*Please see Important Disclosure page