On December 20, 2019, the SECURE Act (Setting Every Community Up for Retirement Enhancement) was signed into law, bringing with it significant changes to the retirement planning landscape.
We believe some of the changes are positive, and some are not. If you have a qualified retirement account (and most of our clients do…), you’ll want to take action now to make sure you are positioned well, given this new legislation.
What happened? The purpose of the SECURE Act was to enhance retirement security for citizens across the US. It will also generate a large amount of tax revenue for the government due to the tax implications from the changes.
So, what are the changes? Here is a list of some of the changes enacted, which may impact our clients.
1. The minimum age for Required Minimum Distributions (RMDs) from qualified retirement accounts (such as 401k, 403b, 457, ESOPs, cash balance plans, and IRAs) has been raised from 70 ½ to 72. This change applies to folks who reach age 70 ½ after December 31, 2019. If you turned age 70 ½ before January 1, 2020, you are not impacted by this rule change.
2. You can now continue to contribute to an IRA over age 70 ½ if you still have earned income. There is no longer an age limitation on IRA contributions. There continue to be income limitations, however.
3. Investors who inherit a retirement account on or after January 1, 2020 have only 10 years to distribute the account in its entirety. This is a huge change to estate planning. It means if you are NOT a spouse (or one of the few exceptions), you can no longer stretch RMDs. Instead, you must withdraw all assets from an inherited qualified retirement account over a 10-year period. This may have significant tax implications for inherited accounts going forward.
4. If you are a small employer, there is now a tax credit to offset costs of starting a 401k plan that has auto-enrollment for your employees. There is also now increased access to multiple employer retirement plans for small employers, making it potentially easier and less expensive to have a retirement plan for employees.
What should you do right now? Because of these changes, who you choose as beneficiaries for your qualified retirement accounts can make a significant impact. Due to the tax implications of these changes, you may want to take the following steps:
1. Review your beneficiaries on your IRAs and 401k (and other qualified accounts) to see if anything needs to be updated. Spouses can continue to stretch distributions over their lifetime. However, for children who are no longer minors, for siblings who are more than 10 years younger than you, or if you have named your Trust as beneficiary, you will want to review your beneficiaries. If your plan was for heirs to live off RMDs later in life, now they must take all distributions with a 10-year period, which could change your estate planning strategy.
For example, you might want to consider adding more beneficiaries. This could spread your assets over more individuals, potentially lessening the tax consequences for your heirs. Or maybe you make your adult children beneficiaries of other assets, rather than money in qualified retirement accounts that are now subject to the new distribution rules. You may want to speak to your financial planner, tax advisor, and/or Trust attorney here.
2. Review your Trust. With these changes, review your Trust to make sure it still serves your goals. Is a Trust the best beneficiary in your case? If you are charitably inclined, it might make sense to consider a Qualified Remainder Trust due to the tax benefits. You will want to speak to your Estate Planning attorney on this.
3. Consult your CPA regarding tax implications for your heirs. If your assets are in IRAs or 401k accounts, it might make sense to review how the new rules will impact your wealth transfer to your beneficiaries. Will inheriting an IRA for your beneficiaries push them into high tax brackets? Are there opportunities you can take now to position your wealth transfer better from a tax perspective? Reach out to your CPA for tax perspective here.
4. Consult with a Retirement Plan expert to establish a plan for your small business. They can walk you through options for your company that have the potential to benefit both you and your employees.
We encourage you to reach out to your trusted advisers and to be proactive here so that you are well-positioned for these changes. If you would like a referral to the estate planning attorneys and/or CPAs we use, please reach out and we are happy to share our resources.
More information about the SECURE Act can be found here:
Ed Slott (IRA expert) commentary
Fidelity FAQ’s about the SECURE Act
National Association of Plan Advisors
Shadowridge Asset Management, LLC does not offer tax planning or legal services, but may provide references to accounting, tax services or legal providers. They may also work with your attorney or independent tax or legal advisor.