How does the SECURE Act affect my retirement accounts?

Over the last week, a lot of clients have been asking about the new RMD/Retirement rules starting in 2020 and what it means for them.

The Setting Every Community Up for Retirement Enhancement Act (SECURE Act or the Act) was signed by the President on December 20, 2019. It makes major changes to retirement account rules. The new rules apply to all qualified plans which include retirement accounts in IRAs, 401(k), 403(b), 457(b), 401(a), ESOP, Cash Balance plans (all retirement accounts are referred to as IRAs below). There are 29 provisions in the Act. Set forth below are explanations of some of the key provisions. Unless otherwise noted the new rules applied on January 1, 2020.

Required Minimum Distributions (RMDs) are required after age 72 instead of 70 ½

• RMDs are distributions that are required to be taken from a Traditional IRA based on the life expectancy of the IRA owner. The tax policy for this rule is to ensure the IRA owner withdraws the retirement savings during the owner’s expected lifetime.
• Under the old rule individuals had to start taking RMDs after age 70 ½. Individuals who turned 70½ in 2019 must continue to follow the old rule. They must take their first RMD no later than April 1, 2020 and their second RMD no later than December 31, 2020.
• Any individuals who were required to start taking RMDs because they turned 70 ½ before January 1, 2020, cannot stop taking their current RMDs and wait until they turn 72.
• The new rule for taking RMDs after age 72 is effective for individuals who attain age 70½ after December 31, 2019.
• For example, a person who attains age 70 ½ in 2020 and attains age 72 in 2021 must start taking their first RMD no later than April 1, 2022 and their second RMD no later than December 21, 2022.
• This change to age 72 will allow the IRA to grow on a tax-deferred basis for an additional amount of time.

Age (70 ½) unchanged to make Qualified Charitable Distributions (QCDs)

• The Act did not change the age (70 ½) after which an individual can make QCDs from an IRA of up to $100,000. If an individual uses the Standard Deduction on their tax return, using QCDs is a tax-efficient way to make charitable donations. Click on our blog post for more information about QCDs

IRAs inherited by a non-spouse beneficiary must be distributed within 10 years

• Previously when non-spouse beneficiaries inherited a Traditional or Roth IRA, they could take distributions over their expected lifetimes. These distributions were referred to as a “stretch IRAs.”
• If beneficiaries were much younger than Traditional IRA owners, stretch IRAs minimized the taxes they had to pay on each distribution and provided a long period for the account to continue to grow on a tax-deferred basis. For a Roth IRA the account would continue to grow on a tax-free basis.
• After December 31, 2019, non-spouse beneficiaries who inherit Traditional or Roth IRAs must take distributions during a 10-calendar year period. The period begins in the calendar year after the year of death of the IRA owner.
• There are no RMDs that must be taken each year within the 10-year period. The beneficiary decides how much to withdraw each year. The beneficiary could decide to wait until the 10^th year to take a distribution of 100% of the account.
• The entire IRA account must be distributed by the end of the 10^th year.
• If the beneficiary who inherits the account is in high tax brackets during the 10-year period, distributions will likely be subject to much higher taxes compared to a stretch IRA.
• There is an exception to the 10-year rule for a beneficiary who is a minor and the child of the IRA owner, but once the beneficiary reaches the age of majority (18 or 21 under applicable state law) the 10-year rule starts to apply.
• There are also exceptions for a beneficiary who is disabled, chronically ill or not more than 10 years younger than the deceased IRA owner.

Traditional IRA contributions allowed after age 70 ½

• Previously a person could not contribute to a Traditional IRA after age 70 ½.
• After December 31, 2019 there is no age limitation on making contributions to a Traditional IRA, provided the person has enough wages. The person can also make contributions to a spouse’s Traditional IRA.
• As before the Act, there are no age-based restrictions on contributions to a Roth IRA.

No 10% Penalty on IRA withdrawals to pay expenses for the birth or adoption of a child.

• Each parent can withdraw up to $5,000 for such expenses from his or her own account without having to pay the normal 10% penalty. The withdrawal will be subject to regular income taxes.
• If the withdrawal is re-contributed, the amount is treated as a rollover and not included in taxable income. The IRS will issue regulations about the timing of re-contributions.

Certain part-time employees will now be eligible for employer-sponsored retirement plans

• Previously, employers did not have to allow employees who worked less than 1,000 hours every year to participate in a retirement plan.
• The new threshold for eligibility to participate in a retirement plan is either one full year with 1,000 hours worked or beginning in 2021 three consecutive years of at least 500 hours worked per year.

529 Plans can be used to pay student loans or for expenses for apprenticeship programs

• Retroactive to January 1, 2019, a one-time withdrawal of up to $10,000 can be made from a 529 Plan to pay off student loan debt for one beneficiary. If there are enough funds in the 529 account, the beneficiary can be changed and up to $10,000 can be used to pay off student loan debt for each of the first beneficiary’s siblings.
• 529 plan withdrawals can be used to pay qualified expenses for an apprenticeship program.

Threshold to deduct medical expenses in 2019 and 2020 changed back to 7.5% of AGI

• This change was not part of the SECURE Act, but the change was passed at the same time.
• The threshold to be able to deduct medical expenses on a tax return in 2019 and 2020 was scheduled to be 10% of Adjusted Gross Income (AGI).
• For 2019 and 2020 the threshold has been changed back to 7.5% of AGI.

If you have any questions about RMDs, IRAs, QCDs or other tax issues please do not hesitate to call our office at 207-761-4733.