January 6, 2020

The SECURE Act: How will it affect your retirement?

The SECURE (Setting Every Community Up For Retirement Enhancement) Act was signed by President Donald Trump on December 20, 2019. This bipartisan legislation is the most substantial overhaul of U.S.-based retirement plans in over a decade and it contains changes that will affect all retirees, including the following:

  1. Required Minimum Distributions (RMDs) will now begin in the year an individual turns 72, rather than the year they turn 70 ½. Pushing the mandatory withdrawals back a few years will allow retirees’ savings a bit more time to grow tax-deferred and give those taxpayers a few more years in which to convert IRA assets to Roth IRA assets. This provision only applies to those individuals born after July 1, 1949, as those born before then already turned 70 ½ in 2019 and are not eligible to utilize the provisions of the SECURE Act in order to delay taking RMDs.
  2. Most IRA beneficiaries inheriting an IRA after January 1, 2020 will have to withdraw all assets within ten years of the primary IRA owner’s death, unless that beneficiary is a spouse or minor child (or qualifies for certain other limited exemptions). This is a monumental shift, as beneficiaries used to have the ability to put off the tax payments on IRA assets for decades by stretching the benefits over each beneficiary’s lifetime. No more – now these accounts must be depleted (and the income tax paid to Uncle Sam) within ten years of the original IRA owner’s death. This is a critical change. You should contact your estate planning attorney if your estate plan includes the naming of trusts as IRA beneficiaries, as this change may alter your estate distribution.
  3. IRA owners may now make deductible contributions to their IRAs beyond age 70 ½. This is a substantial benefit for seniors, recognizing that Americans are increasingly working and living longer; however, it is worth pointing out that IRA owners must have earned income in order to contribute to an IRA, so you can only make these deductible contributions if you are still working. Talk to your accountant if you have questions about the specifics of this provision.
  4. The amount of each year’s RMD that a taxpayer may re-direct to charity is impacted by deductible IRA contributions made by taxpayers aged over 70 ½. If you are using Qualified Charitable Distributions, check with your accountant to make sure your deductible contributions do not negatively impact the amount you may give to charity under these provisions.
  5. The SECURE Act contains many provisions designed to increase access to retirement plans for workers at small companies. These provisions are grouped together under the heading of Multiple Employer Plans (MEPs) and these provisions do not take effect until 2021.

These are a variety of ways a family may plan around the provisions of the SECURE Act. Some families are building longer payment streams for beneficiaries through the use of testamentary charitable remainder trusts, while other families are crafting nuanced beneficiary arrangements to pay some IRA assets out to children following the first parent’s death (thereby allowing for a longer distribution period if the surviving spouse lives a while before leaving the remaining IRA assets to the children and starting another ten-year clock).  Please contact our planning team if you would like to talk about how the SECURE Act may affect your plan.