It has been a whirlwind week with the House voting to impeach the President. What has nearly gotten lost in the news is that the Senate attached the SECURE Act (Setting Every Community Up for Retirement Enhancement) to the December 20 fiscal 2020 spending authorization bill. I wrote to you earlier this year about the SECURE Act when it was passed by the House of Representatives in May. It seemed like it would sail through the Senate, and then it got stalled. It is now expected to be passed with the spending bill. What does that mean for you?
Here are the highlights:
- Required minimum distributions from your IRAs will be delayed from the current age 70 1/2 to age 72
- Non-spouse IRA beneficiaries will have to take the money out over a ten year period, instead of over their lifetimes (the so-called “stretch” provision).
- People who are working past age 70 1/2, will be allowed to contribute to an IRA. (They cannot now, but surprisingly, at that age they are still allowed to contribute to a Roth IRA.)
- Families who adopt or have newborn children can take out up to $5,000 from their retirement plan without the usual 10% early distribution penalty.
Losing the ability for non-spouse beneficiaries to take distributions over their lifetimes has significant tax implications, since currently an IRA inheritor age 25 would only have to take out 1/58th of the money in that year, 1/57th the year after, and so forth for the rest of his/her life. Taking all the money from a large IRA out in the tenth year after inheritance could have potentially severe tax consequences on the unsuspecting inheritor.
Utilizing Roth conversions to take advantage of very low tax rates (at least until 2025) and build a tax-free account that you can leave to your beneficiaries will be more advantageous now. It might now make sense to forgo a deduction today and contribute to a Roth 401(k) instead of a Traditional 401(k). Some might even leverage life insurance by using distributions from their IRA to fund whole life premiums that will pay off much more than the IRA and be tax-free.
For business owners, the new law would increase the tax credit for small businesses to set up new retirement plans for their employees, from $500 to $5,000. It would allow small employers to automatically enroll their employees, as well as allow smaller companies to create multiple employer plans with other companies in the area, reducing the obstacles to offering 401(k) and other retirement plans. A great deal of insurance industry lobbying support went into another provision that would require all qualified plans to show participants how they can convert their existing balances into “lifetime income” through an annuity.
In all, the SECURE bill has 29 new provisions or major changes in 20 sections. These changes will have a major impact on both estate and tax planning. If you want to discuss whether a change is needed to your planning before our next review meeting, please don’t hesitate to call.