I would be willing to bet that none of you discussed the SECURE Act IRA rule changes that went into effect on January 1, 2020 over the holidays. I don’t blame you. I tried to broach the subject during Christmas Eve dinner and only heard crickets from the rest of family. While we were all busy enjoying holiday festivities, Congress was busy adjusting the tax law. They gave us the SECURE Act which has presented a number of changes and new rules for tax planning and also estate planning.
In summary, we are not overly excited about the SECURE Act but there are a few specific law changes that will be beneficial for retirees.
The Highlights
- RMD Age: Required minimum distributions (RMDs) now must begin by age 72, not 70 ½. If you turned 70 ½ in 2019 or earlier, you are unaffected. If you turn 70 ½ in 2020 or later, you will not need to start taking RMD’s until age 72.
- Deductible IRA Contributions: The “old” law stated that you could not make IRA contributions to a traditional IRA after age 70 ½. The “new” law repeals the age restriction on contributions to traditional IRA’s.
- Charitable Giving From IRA: The qualified charitable giving option will stay the same but it will change. What do I mean? You will still be able to use up to $100,000 of your RMD and pay that directly to a qualified charity. However, any deductible IRA contribution after age 70 ½ can reduce your annual charitable allowance. If you have specific questions on this, please let us know. This change is a little more complex and has a few moving pieces.
- Stretch IRA Provisions: One major negative shift in this tax policy is the elimination of the "Stretch IRA." Prior to 2020, this applied when a non-spouse inherited an IRA – usually an IRA inherited from a parent. Previously, the recipient could use their own age in calculating RMDs and possibly "stretch" the IRA into many more decades of tax-deferred accumulation. The new rules require non-spouse recipients to terminate and distribute the IRA balance within 10 years of the death of the original owner. The law reads that the entire IRA has to be distributed within 10 years… note that there is not a schedule of when you have to take the distributions (i.e. you could distribute all of the IRA proceeds in year 10).
- Potential Roth Conversions: This change presents some “new” ways for investors to strategize as it pertains to income tax savings. The 10 year limit on deferral for beneficiaries must now be weighed against the value of pre-paying taxes at today’s federal income tax rates.
- “Grandfather” Status: It is important to note that anyone who inherited an IRA from a family member before 12/31/19 was “grandfathered” under the old law. This means they can continue to “stretch” their beneficiary IRA.
There are other changes to be considered with the SECURE Act, but this is the list of the changes that will impact some (if not all) retirees. Because we do not give tax advice, we suggest you discuss these possibilities with your tax professional.
Have specific questions about your situation? Please give us a call.
About The Author
Matt Price serves as a Partner and Senior Vice President for The Price Group of Steward Partners. He resides in Houston with his wife, Emily, their two daughters and the family golden retriever. Matt studied at the University of Pennsylvania – Wharton School of Business. Over the past 9 years, Matt has helped families make high quality, common sense decisions regarding their wealth and their legacy. Matt firmly believes that everyone needs a wealth coach!