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January 01, 2020


On December 20, 2019, new legislation known as the SECURE Act was enacted that included important changes affecting retirement plans, including IRAs.  Unless otherwise noted below, the new law generally takes effect on or after January 1, 2020.

Elimination of the “Stretch IRA”

One of the most important changes is the elimination of the “stretch IRA” provision that previously allowed non-spouse beneficiaries who inherit traditional IRA and retirement plan assets to spread distributions over their lifetimes.

This provision allowed taxable distributions to be deferred for a second generation after the death of an IRA or retirement account owner, and it made deferrals of distributions from IRAs especially attractive, even though the pre-tax balance could be included in the account owner’s taxable estate.

However, the new law requires any non-spouse beneficiary who is more than 10 years younger than the account owner to distribute the entire balance within 10 years of the account owner’s death, unless the beneficiary is a minor child or a disabled or chronically ill individual. This ten-year rule will apply regardless of whether an account owner died before or after his or her required beginning date, and also applies to Roth IRAs. Trusts that have been designated as IRA beneficiaries would also be impacted.

As a result of this new law, you should give consideration to:

Reevaluating beneficiary choices—perhaps including a charity(ies) for those already intending to leave assets to charities; and/or

IRA distribution strategies, possibly even including a Roth IRA conversion, or a series of Roth IRA conversions over several years, in order to qualify more of the taxable distribution amounts for taxation at the lower tax brackets that were expanded under the 2017 Tax Cuts and Jobs Act that went into effect in 2018 but is slated to sunset on January 1, 2026. After the account owner’s death, non-spouse beneficiaries would still be subject to the 10-year payout limit, but those future distributions would be tax-free.

Age 72 as New Start Date for Required Minimum Distribution (RMD) from IRAs

Retirees will no longer have to take required minimum distributions (RMDs) from traditional IRAs and retirement plans by April 1 following the year in which they turn age 70-1/2. Under the new law, individuals who have not already attained age 70-1/2 as of December 31, 2019 will not be required to arrange RMDs until April 1 following the year in which they turn age 72. For those 70-1/2 or older as of December 31, 2019, this new provision will not apply and they must continue to take their annual required minimum distributions under the pre-SECURE Act rules.

Other Changes Affecting IRAs and Qualified Retirement Plans

The SECURE Act includes a number of other provisions affecting IRAs and Qualified Retirement Plans, such as 401(k) plans. The changes include, but are not limited to, the following:

Under the current law, contributions beyond age 70-1/2 were allowed for Roth IRAs but not for traditional IRAs. Under the new law, people who choose to work beyond traditional retirement age will be able to contribute to traditional IRAs beyond age 70-1/2. However, the cumulative net deductions allowed because of this change will reduce the $100,000 annual limit on amounts that may be transferred directly from a traditional IRA to a qualified charity (Qualified Charitable Distributions, or QCDs) without being included in income.

Workers will begin to receive annual statements from their employers that, in addition to reflecting their retirement plan balances, will also reflect a projection of the equivalent monthly income to be received over a lifetime. This is intended to help workers better gauge progress toward meeting their retirement-income goals. Companies must comply with this provision by December 20, 2020.

Employers will now have easier access to multiple employer plans (MEPs) which allow small businesses to achieve economies of scale and access to pricing models that were typically available only to larger organizations.

A credit available to small businesses who start a new retirement plan has been increased. Small businesses may now claim a credit of up to $5,000 against such startup costs in the initial start-up year and subsequent two years. The allowable credit will equal at least $500, and increases by $250 for each non-highly compensated employee eligible to participate, up to a maximum credit of $5,000.

Other Changes

Section 529 Education Funding Account balances can now be used to repay student loan amounts up to a cumulative total of $10,000 (not annual). But, ask us first whether your state also allows tax-free withdrawals from a 529 plan for this purpose. Under the “kiddie tax” the first $1,100 of unearned income for a child (generally an individual under age 19, or under age 24 if a full-time student) was exempt from tax, the next $1,100 of unearned income was taxed at the child’s tax rate, and unearned income over $2,200 was taxed at the parent’s marginal tax rate. The 2017 Tax Cuts and Jobs Act revised the kiddie tax so that a child’s unearned income over $2,200 would instead be taxed at the compressed income tax rates that apply to trusts (for which the top marginal rate of 37% applies when income reaches only $12,750). The SECURE Act repeals that change in 2020, and allows either method to be applied in 2018 and 2019. So a child’s 2020 unearned income in excess of $2,200 will once again be taxed at the parent’s marginal tax rate, and taxpayers may elect retroactive application of this methodology on their 2019 and amended 2018 tax returns.

This is just an overview of some of the more important provisions included in the SECURE Act legislation that generally takes effect on January 1, 2020. If you have any questions regarding these and other provisions and how they may apply to your particular circumstances, please do not hesitate to contact a member of your Beacon Trust team.

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