The SECURE Act, passed in December of 2019, puts in place new retirement rules
On December 20th, 2019, the Setting Up Every Community for Retirement Enhancement (SECURE) Act of 2019 went into effect. While the law changed some arcane regulations that will only apply to a sliver of people, there were a couple major changes. These new rules will affect the vast majority of retirees. Here’s a quick run down of the provisions we feel will be most relevant for our clients:
- Required mandatory distributions (RMDs) will now begin at 72. Previously, one was forced to begin withdrawing from qualified retirement accounts (i.e. a 401k, IRA, SEP IRA, 403b, TSP, etc.) at age 70.5. This is a net positive as it provides for another 1.5 years of tax-free investment growth. However, one can only take advantage of this if they have other assets to draw down in the meantime. If you were depending on your retirement accounts to fund your living expenses by age 70.5, then it doesn’t mean much for you. Although, you do have the option of simply taking out less than your RMD amount until age 72. Finally, note that you may still make tax-deductible charitable contributions at age 70.5.
- Estate planning implications: Those inheriting an IRA will be forced to withdraw 100% of the balance within 10 years. Previously, an inherited IRA could be turned into what is known as a “stretch” IRA. This allowed a beneficiary to spread out the distributions over their own lifetime. Continued tax-free growth and a minimal tax liability in any given year were the benefits. Consider this example: Under the new law, an individual in their 70s with a $1m IRA passes away, leaving the account to his daughter and her husband, who are both in their late 30s. The daughter and husband live in a high tax state and both have six figure salaries. Under the new law, they will eventually be forced to make six-figure disbursements from the inherited IRA. This income could be taxed at a high marginal rate in the 30%-40% range depending on the couple’s exact income. While it is still a windfall, it is not a tax-efficient transfer of wealth. The individual in their 70s should rethink their estate plan.
- Annuities may become more prevalent offerings in 401(k) plans. I look at this as a net negative. My father always says “Annuities are sold, never bought.” There’s a reason for this! Annuities come with high fees and high commissions to the brokers who sell them. The returns are typically paltry, although they are guaranteed. The annuity industry’s tactics are to scare you into thinking we’re headed for a market crash (or some other way to drum up fear) in order to get you to accept a low return. Unless you are in a unique situation or have panic attacks just thinking about the market, I would avoid this option at all costs.
- 529 Plan assets can now be used to repay up to $10,000 of student loans. Moreover, 529s can now be used towards certain apprenticeship programs. This increases the flexibility of 529 Plans and also attempts to address the student debt issue. This new regulation also opens up an interesting possibility. Taking out a low cost loan to pay for education expenses in order to allow your 529 Plan to grow tax free for a longer period before dipping into it. I would consult a professional before trying something like this, however.
We are currently incorporating these news rules into our financial plans. Our financial planning software was updated to reflect the new SECURE Act shortly after it was released. For most people, it will have a relatively minor effect. But if you are concerned about the changes, I would encourage you to contact us to discuss your situation. I hope you found this quick update helpful. Please let us know if you have any questions!
COVID-19 Update: Due to the emergency stimulus bill passed by Congress last month, mandatory minimum distributions from retirement accounts have been waived for 2020. The rationale here is to give retirees the ability to avoid selling securities in a depressed market. If you are currently taking distributions from your retirement accounts but can afford to hold off during 2020, this would have the advantage of lowering your tax burden as well as giving your assets more time to grow tax-free.
This is not an offer or recommendation to buy or sell any security and does not constitute investment advice.