Stretch IRAs Are Mostly Dead. RMDs Pushed Out to Age 72: How Will It Affect You?

Stretch IRAs Are Mostly Dead. RMDs Pushed Out to Age 72: How Will It Affect You?

Late last year, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed as part of the government’s spending bill and took effect on January 1, 2020.  This new legislation is intended to strengthen retirement security for many individuals. Required distribution rules are changed – some good, some bad.

Key provisions in the SECURE Act that could affect you include:

• Required Minimum Distributions Delayed – The age by which individuals were required to begin Required Minimum Distributions (RMDs) has been increased from 70 ½ to 72. This change only applies to individuals who turn 70 ½ in 2020 or later.
  • Planning Point – This may make Roth IRA conversions more attractive for those under age 72.

• Traditional IRA Contributions at Any Age – Prior to the SECURE Act, there was an age limit of 70½. Now eligible taxpayers of any age can make traditional IRA contributions.
  • Planning Point – This also makes make back door Roth IRA conversions available to individuals over 70½.

• Eliminates “Stretch” IRA Payout – Prior to the SECURE Act, individual beneficiaries were allowed to “stretch” post-death distributions based on the life expectancy of the beneficiary. This will now be replaced by a 10-year payout period. This means that individuals are not required to take a distribution every year, but that the entire account must be distributed by the end of the 10^th year following the death of the account owner. Exceptions exist for spouses, minors, those not more than 10 years younger, and the disabled. IRAs inherited prior to 2020 are grandfathered under the prior stretch-out rules.
  • Planning Points
    • Trusts named as IRA beneficiaries may violated the new 10-year distribution rule. Consider changing the beneficiaries or review/revise your trust as needed.
    • For those that the new 10-year distribution rule applies, consider spreading out the distributions over all 10 years to reduce taxes. Accelerate distributions in any low tax bracket years.
    • For those individuals with IRA accounts, it may be prudent to make Roth IRA conversions sooner rather than later. Small Roth IRA conversions now may result in lower taxes than large annual IRA distributions required by your beneficiaries.
    • For those already 70½, make Qualified Charitable Distributions (QCDs) from IRA accounts. This reduces current and future taxable income for yourself and beneficiaries.

• 10% Early Distribution Penalty Exception – This exception would allow for a penalty-free distribution of up to $5,000 from an IRA or employer plan for a “Qualified Birth or Adoption Distribution.” To qualify for this exception, the account owner must take the distribution within one year of the date of birth or the date of adoption. This provision also allows for, but does not require, the individual to repay this distribution to the plan or IRA at a later date.

• Annuities in 401(k) Plans – More employers will now be allowed to include annuities as an investment choice in their plans, as the fiduciary responsibility for these annuities has shifted from the employer to the insurance company providing the product.

• Open Multiple Employer Plans – The SECURE Act establishes open multiple employer plans (MEPs), which means that employers of all sizes can merge together to create “open” MEPS or pooled plans. This should offer retirement plans to more employees at a lower cost to the employer.

• Tax Credits – Small businesses who start new 401(k) plans or SIMPLE IRAs will receive an increased tax credit of up to $5,000 from $500. Additionally, if they add auto-enrollment to their retirement plan, they may be eligible for an additional $500 tax credit per year for the first three years.

In addition to retirement plan provisions, the new legislation also expands provisions for 529 Education plans:

• Expanded Eligible Expenses for 529 Plans – In addition to the current eligible expenses for 529 Plans, individuals may now use distributions to pay for expenses for registered apprenticeship programs. These programs must be certified with the Department of Labor.

• Student Loan Repayment from 529 Plans – Distributions can now be made tax-free from 529 Plans to pay down student loans – referred to as “Qualified Education Loan Repayments”, limited to a lifetime amount of $10,000.

There are still parts of the SECURE Act that are subject to further clarification. As WESCAP Group monitors these clarifications, we will provide further information to our clients.

To learn more about how the SECURE Act may affect you, please contact a WESCAP Advisor.

Sincerely,

The WESCAP Group Team