The Congress recently passed and the President signed the SECURE act. SECURE is another inane Congressional acronym, so I won't spell it out (ever wonder whose job it is to make up those acronyms?). But the SECURE act is important, as it could significantly impact your financial plan and your tax burden in the future.
There are several things that changed with the SECURE act. The first, and I think most impactful, change is the elimination of Stretch IRAs. Stretch IRAs aren't a different type of IRA. It is just a way to signify that the inheritor of an IRA could stretch the distributions over his or her life expectancy. That went away and now all funds inherited in an IRA after January 1st, 2020 must be withdrawn within 10 years. You can take the funds out evenly or wait until year 10 and take it all. There are several planning opportunities here to "choose" your tax rate. You may want to fill up a tax bracket every year even if that might distribute all the funds prior to 10 years. Or perhaps your taxes won't go up that much if you wait until the end of the 10-year period and you'll have more money in your pocket even if you pay an higher tax rate.
It is important to note that this rule doesn't apply to spouses, individuals more than 10 year younger than the decedent, certain minor children (only to the age of majority) and a few other special cases. For TSP, this rule doesn't go into effect until 2022
The most significant effect of this change will be for those who have named a trust as a beneficiary of an IRA. Most trust language, directs the trustee to pay out the Required Minimum Distribution (RMD) to the beneficiaries each year. But the new law in essence eliminates RMDs in inherited IRAs other than in year 10. This could cause a lot of problems and to be blunt, we're still figuring this out. If you're a client, we'll be addressing it. If you're not, you might want to talk to your estate planning attorney if this applies to you.
The next significant change, is raising the Required Beginning Date (RBD) to age 72. You won't have to figure out when you pass a 1/2 year birthday. If you're age 72 on the 31st of December you have to take a distribution for that year. Like the current law, you can delay the distribution until 1 Apr of the year after you turn 72, but you'll have to take two distributions in that year, if you choose to delay your first distribution. And, in case you're wondering, if you turned age 70 1/2 prior to 1 Jan 20, you have to take a distribution for 2019 and 2020 even though you won't be age 72 yet.
One thing that doesn't change is you can make Qualified Charitable Contributions (QCD) starting at age 70 1/2. If you have significant charitable aspirations, a QCD is a very tax efficient way to support charity.
Some other changes include eliminating the 10% penalty for early withdrawal if used for childbirth or adoption. There are limits though. Another change allows you to contribute to a Traditional IRA after age 70 1/2 (That has always been the case with Roth IRAs).
What to Do?
As is the case with most new tax law, some things won't be clear until the regulations are written. It does appear that estate plan changes will almost certainly be required. Roth IRAs and/or conversions to Roth IRAs may be more appealing. Tax bracket management will take on a new significance for retirees and those who inherit IRAs.
If you'd like to chat about how this tax law change might affect you, give us a call.
If you found this article useful, you might like the following blog posts: