The SECURE Act – how might it affect me?

January 15, 2020

The SECURE Act stands for “Setting Every Community Up for Retirement Enhancement” and is the most significant change to retirement plan policy in over a decade. Here is a breakdown of some highlights of the SECURE Act, as well as some high-level strategies to consider. As with any overhaul, we’d expect to see positive and negative modifications relative to the current legislation.  We have not included every change of the SECURE Act because we wanted to focus on the changes which we believe will impact most of our clients.  Given that each person’s situation is different, it is important to review your financial and tax situation with a professional, such as your CCMI advisor, before making any changes to your current retirement strategy.

The Positives:

  • The mandatory age to begin Required Minimum Distributions (RMDs) has been raised from age 70½ to age 72 for individuals. (It is important to note that those who turned 70½ prior to January 1, 2020 are not allowed to stop or delay their RMDs and will still be subject to the requirements of the previous law).
  • IRA contributions are no longer prohibited after age 70½. Now that Americans are working longer, contributing to an IRA is no longer restricted as long as they have earned income. 
  • Provisions encouraging more savings within 401(k)s have been added, which include tax credits for small businesses to establish a 401(k) or other retirement plan, increases to the maximum contribution for 401(k) auto enrollments, and access for long-term, part-time employees who meet certain requirements to participate in their employer’s 401(k) plan.
  • Changes were made to the use of IRA and 401(k) funds. While there are restrictions such as prohibiting credit card access to 401(k) loans, other provisions allow for qualified distributions within IRAs for birth or adoption.
  • Other non-retirement related provisions were added that include allowing 529 plan funds to be used for student loans, repealing the Kiddie Tax changes made in the Tax Cuts and Jobs Act of December 2017, and making favorable adjustments to the medical expense deduction threshold back to 7.5% of AGI.

 The Negative

  • Most IRAs that are inherited after January 1, 2020 by a non-spouse must now be fully distributed within 10 years as opposed to “stretching” the distributions over the lifetime of the beneficiary. (This does not apply to exempt beneficiaries such as spousal beneficiaries nor to beneficiaries who are less than 10 years younger than the decedent, to name a few). 

Conclusion

While there are many changes that allow more flexibility in terms of retirement planning and allow more access and options for individuals to save for retirement, other key provisions have been taken away.  In particular, the elimination of the stretch IRA for non-spouse beneficiaries and the new requirement to distribute an inherited IRA over 10 years will generally create taxable income to the beneficiary over a much shorter period of time than under the previous law. For most individuals, this will mean that IRAs that are left to a child or other relative will now be withdrawn (and taxed) more quickly than before, likely in high earning years, resulting in a much larger tax consequence than the stretch IRA.  There are other SECURE Act changes which can be viewed as having both a positive and negative effect, such as expanding annuity options within 401(k)s.  While it provides more options for lifetime income within a 401(k), it also creates other challenges and complexities which should be reviewed on a case-by-case basis.

Strategies:

  • Re-evaluate beneficiaries especially if your primary beneficiary is not your spouse. Consider electing someone who is within 10 years of your own age or adding additional beneficiaries to spread distributions among more heirs. There are some downsides depending on the beneficiaries you select; therefore, we recommend seeking the advice of a professional given your specific situation.  Additionally, having trusts as beneficiaries will likely no longer work.  A discretionary trust may work as the RMD can be paid from the trust; however, the remainder of the IRA would be taxed at very high trust tax rates.
  • Manage tax brackets by pursuing Roth conversions or increasing IRA distributions in low tax years. Roth IRAs are still held to the 10-year distribution requirement; however, the distributions are not taxable.  If someone is charitably inclined, they can consider Qualified Charitable Contributions (QCDs) once they reach age 70½ (as the age requirement for a QCD did not change under the SECURE Act).  These gifts reduce the taxable IRA balance that may be left to beneficiaries and excludes the amount from income in the year of the contribution.
  • Consider other means for large IRA balances over $1 million. These options would be ideal for those who have other sources of cash and do not need the IRA funds for everyday living.  One option would be to withdraw IRA funds (after age 59½) and invest in life insurance if there is a desire to leave a legacy for the next generation.  If charitably-inclined, consider charitable options such as a charitable remainder trust or direct charitable beneficiaries.  There are pros and cons to each of these options that should be reviewed with a professional.

In conclusion, there are many changes to consider with the recent passing of the SECURE Act, and the CCMI team is strategizing on the best ways to address these changes for our clients.  If you have any questions on the SECURE Act changes, please let us know how we can help.


CCMI provides personalized fee-only financial planning and investment management services to business owners, professionals, individuals and families in San Diego and throughout the country.  CCMI has a team of CERTIFIED FINANCIAL PLANNERTM professionals who act as fiduciaries, which means our clients’ interests always come first.
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