As expected, the Setting Every Community Up for Retirement Enhancement Act (“SECURE Act”) has become law after passing as part of the recent spending bill. The House of Representatives approved it in early 2019 with bipartisan support, but the legislation was held up in the Senate until now. Let’s look at a high-level view of what the SECURE Act means for you.
The intent of this legislation is to make retirement plans more accessible and give participants in retirement plans greater information. For example, the SECURE Act expands participation to part-time employees, allows for IRA contributions after age 70½, requires plans to provide participants an annual estimate of the monthly payments received if the account were annuitized and allows annuities to be offered by plans. Clearly, the insurance lobby was instrumental in this aspect of the SECURE Act.
IMPACTS REQUIRED MINIMUM DISTRIBUTIONS FOR NEXT GENERATION
The most impactful aspect of the SECURE Act for our clients is the change made to required minimum distributions from retirement plans beginning in 2020. The Act basically eliminates the “stretch” out opportunities of an IRA paid to children and grandchildren. We have counseled that an outright gift of your IRA to a child allowed your child to take minimum distributions over their life expectancy. For example, if a child is age 50 upon the parent’s death, the account could be distributed over approximately 34 years or more.
Under the SECURE Act, the account will need to be completely distributed over no more than 10 years. The Act provides a few exceptions to this 10-year payout: 1) minor children (until age of majority), 2) disabled and chronically ill individuals, and 3) individual not more than 10 years younger than the participant.
The SECURE Act foundationally supports the thinking that IRA and retirement accounts are designed for the benefit of spouses and not for the benefit of the next generation of the family. Essentially, there is no change to how IRAs and retirement plans are left between spouses. A surviving spouse can still rollover an IRA inherited from his or her spouse. The major difference you’ll see from the SECURE Act is in benefiting children and grandchildren and only applies to those who begin to take minimum distributions in 2020 and beyond.
IMPACT WHEN TRUST IS BENEFICIARY
This 10-year payout has significant impact on IRAs that name trusts as beneficiaries. Many clients name trusts as the beneficiary of their IRA to provide management and control of the assets for children. The concern is trusts’ income tax brackets are significantly compressed, meaning income gets to the highest bracket very quickly (at about $13,000). As the SECURE Act increases payout amounts, these amounts will be in higher brackets.
In addition, many trusts were designed to immediately pass out the anticipated small amount of minimum distribution based on life expectancy to avoid the trust’s income tax. Based on the new 10-year rule, these trusts are going to be sending a much larger amount out to the beneficiary, undoing the management and control desired by the client.
NEW REQUIRED MINIMUM DISTRIBUTION START DATE
For those who have not yet been required to take a distribution, one benefit of the new SECURE Act is the start date of taking required minimum distributions. Now, minimum distributions don’t have to start until age 72 (instead of 70 ½). This gives some extra time for deferral of income taxes as well as more opportunity for Roth conversion planning in lower income tax years.
Any change in tax law requires attention and review. We are working with clients to address how this new tax law impacts planning of retirement plan assets and help implement any changes to beneficiary designations. The SECURE Act also calls into question whether Roth conversions of retirement assets have a broader application to clients and their beneficiaries.
Should you be in the market for a wealth management firm to counsel you in financial planning and monitoring issues like these, consider CI Budros Ruhlin Roe and put our 40 years of experience to work for you.
John D. Schuman, JD, CFP®, CPA (inactive)