A major bill called the SECURE Act passed by Congress and approved by President Trump changes key aspects of retirement accounts. “SECURE” stands for “Setting Every Community Up for Retirement Enhancement.” Effective January 1, 2020, this piece of legislation is substantial and vast in its scope. The bill will impact many people immediately. In an effort to educate and to stay ahead of the new legislation, I have compiled five important points that are likely to impact many of our clients. These are only five of the many provisions contained in the SECURE Act. You can expect continued information and education from our team in the coming weeks and year.
Under previous rules, the IRS would require you to start taking distributions from your IRA account once you reached age 70 ½. The SECURE Act has changed this to age 72, so it provides some relief to people who don’t enjoy taking the RMD and paying the associated taxes. Simply by taking the “half” age out of the mix, it makes this rule easier to understand and follow. But this favorable development only applies to folks who reach 70 ½ after 2019. So, if you turned 70 ½ in 2019 or earlier, you must continue under the former rules. As with the previous law, you can still delay your first RMD until April 1 of the following year, but you will also have to take the following year’s RMD in that same year.
For people that are having to take RMDs, but do not need the income and/or would rather not pay the associated tax, QCDs have become a popular charitable giving strategy. (We see this with a lot of our clients.) QCDs allow you to withdraw from your IRA, satisfy your RMD, give directly to charity, and have the withdrawal be non-taxable. The SECURE Act does not change anything with regards to QCDs, and you are still allowed to start doing this at age 70 ½ even though you’re technically not required to do a RMD.
Under previous law, you were not allowed to contribute to your IRA once you reached the year you would turn age 70 ½. Starting in 2020, you will be able to contribute to your IRA at any age as long as you have earned income, or if your spouse has earned income. This change comes in an era where individuals and/or spouses are working later into life, so this might help in certain situations.
This is a fairly significant law change for a small percentage of people who will inherit a retirement account. In the past, non-spouses who inherited an IRA or retirement account could stretch the required distributions over life expectancy. Starting in 2020 if you inherit as a non-spouse there is a new 10-year rule, which means the entire inherited retirement account must be withdrawn by the end of the 10th year following the year you inherit. The timing of the withdrawals are at the discretion of the person who inherits, and there are no requirements each year as long as the account is empty at the end of 10 years. Thus, there is some flexibility when it comes to timing withdrawals. Certain individuals are exempt from the new 10-year rule; these are spouses, chronically ill beneficiaries, disabled beneficiaries, and individuals who are not more than 10 years younger than the individual who passed away.
There are a couple updates to 529 plans that are worth mentioning. One is that you can now withdraw up to $10,000 (lifetime amount) for qualified education loan repayments. These payments can be used to pay principal and/or interest of qualified education loans. Another 529 plan update allows expenses for qualified apprenticeship programs to be paid from 529 funds. These programs must be registered and certified with the Department of Labor.