The SECURE Act and You: Is It Time to Update Your Strategy?
By Chris Hostetler
Enacted in December, there’s a new law that will bring broad changes to the way we all use our retirement plans. It’s dubbed the SECURE Act – Setting Every Community Up for Retirement Enhancement Act – a name clearly built to serve a marketable acronym.
We thought it would be helpful to highlight some of the ways you’ll be affected by the law, which was passed with bipartisan support as part of a broader appropriations bill. It doesn’t have a particularly cohesive theme but contains a plethora of changes intended to provide more access to retirement accounts such as 401(k)s and IRAs, add some protections for investors, and give you more flexibility (for the most part). But a few provisions will restrict options for some. And you may need to do adjust your planning.
Six noteworthy changes:
The age when you start taking Required Minimum Distributions (RMDs) from IRAs and retirement plans is now 72 (it used to be 70 ½). This affects anybody who had NOT turned 70 ½ before January 1, 2020. Some related notes:
If you turned 70 ½ in 2019, you must still take an RMD in 2020.
Oddly enough, Qualified Charitable Distributions were NOT changed. You can still do QCDs after you turn 70 ½, even though RMDs don’t begin until age 72.
There is NO longer an age limit for making Traditional IRA contributions – you still must have earned income and be below certain income limits to deduct contributions, but you can continue funding your IRA even after you start taking RMDs.
RMD rules are also changed for inherited IRAs – many beneficiaries inheriting these funds must now distribute the full balance within 10 years, rather than being able to “stretch” distributions over their lifetime.
Certain beneficiaries – particularly spouses and minor children – may still be allowed to use lifetime distributions. This is effective for Inherited IRAs created when the original owner dies in 2020 or later.
Long-term part-time employees will soon have more access to 401(k) plans. Retirement plans will be required to allow enrollment for employees who work at least 500 hours/year for three years in a row. Previously, plans could exclude anybody who worked less than 1,000 hours a year. The way the law is written, this will take a few years to be implemented.
For “qualified birth or adoption distributions”, penalty-free withdrawals of up to $5,000 can be made from IRAs or allowed retirement plans. These distributions would be free of the 10% early-withdrawal penalty, but remember they will not necessarily be tax-free.
Your defined contribution plan (such as a 401(k) or 403(b)) will now be required to provide at least annually an estimate of the lifetime income that you could expect to receive from your plan balance beginning in retirement. This should start happening in 2021, as the Department of Labor needs to first issue guidance on how plans provide this estimate.
3 Key Planning Strategies to Consider
Roth conversions – You may have more time to convert tax deferred funds to a tax-free Roth IRA, because of the later age for RMDs. Depending on your birthday, you there could be an additional one or two years to convert to Roth, particularly helpful if you have lower income than you will when RMDs start. Additionally, you may want to consider converting even more funds to Roth IRAs so your heirs can inherit funds tax-free, because of the new RMD rules for inherited IRAs.
If you’d like to read more on Roth conversions, see our previous post on the subject: https://www.hilltopwealthadvisors.com/blog/entryid/781/why-roth-conversions
Inherited IRA required minimum distributions – if you inherit a tax deferred IRA after 2019 and have to distribute funds within 10 years, it’s especially important to plan the timing of the distribution. Generally speaking, you’ll want to distribute these funds during years of lower taxable income to minimize the tax cost.
Tax deductions after age 70 ½ – heretofore, Traditional IRA contributions simply were not available to you if you worked into older age. Now, you may be able to take advantage of these deductions along with your kids and grandkids.
We’d love to be able to give you a more clearly organized breakdown of these rules, but this law really is a smorgasbord of rules related to retirement plans. If you’re a sucker for legal language, go to the appropriations bill and scroll to Division O: https://www.congress.gov/bill/116th-congress/house-bill/1865/text#toc-HCA1D88A5E43A4E0E80FD13D0396A5E94.
It’s highly likely that your financial plan is affected by one or more of these changes. We encourage you to speak with your advisor to understand how the SECURE Act affects you.
Disclaimers:
This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.
Hilltop Wealth Advisors does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state laws are complex and constantly changing. You should always consult your own legal or tax professional for information concerning your individual situation.