The Secure Act is changing retirement planning. Here's what you need to know.

Secure Act update by McRae Capital Management.

On December 20th, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act.  The bipartisan law will have an immediate impact on retirement plans and 529 college savings accounts.  Most provisions in the law go into effect on January 1, 2020.

Like any piece of legislation, there are many moving parts, but we feel the items below will have the most significant impact on our clients.

  1. Required minimum distributions (RMDs) now begin at age 72.
  2. You can make IRA contributions beyond age 70 ½ if still working.
  3. Inherited IRA distributions to a non-spouse generally must be taken within 10 years for inheritance after 1/1/20.  Accounts inherited prior to 1/1/20 can use the old distribution rules.
  4. Annuity products can now be purchased in 401(k) plans.
  5. 529 funds can now be used to repay student loans, up to $10,000.

These items will not only have a potential tax impact but could also affect many estate plans as well.  We strongly recommend you review your estate planning documents to make sure they align with the new law, especially if a trust is named as a beneficiary of an IRA or 401(k).

Required Minimum Distribution (RMD) age increased to 72

Prior to the SECURE Act, individuals had to take a required minimum distribution from an IRA at the age of 70 ½.  The age requirement has been pushed to 72 years old and is only in effect for people who turned 70 ½ after December 31, 2019.  If you have already started taking required minimum distributions, there is no change and you will continue distributions under the old rules.  For younger individuals, this new rule will allow you to delay taking a required distribution by 18 months.

You can make IRA contributions beyond age 70½

Under the act, you can continue to contribute to your traditional IRA past age 70½ as long as you are still working.  This means the rules for traditional IRAs will align more closely with 401(k) plans and Roth IRAs.

Non-spouse IRA beneficiaries must distribute the assets in 10 years.

Prior to the SECURE Act, a beneficiary of an inherited IRA or 401(k) could take distributions over their lifetime.  This was often referred to as a “stretch IRA”.  Using an extended life expectancy, this allowed for longer tax-free growth and was an effective estate planning tool.  The new law now requires non-spouse beneficiaries to take a full distribution within 10 years following the death of the account owner. This is for IRA accounts inherited AFTER 1/1/20. If you already have a inherited IRA account from a previous inheritance, you can continue to use the old rules.

Exceptions to the 10-year rule include assets left to a surviving spouse, a minor child, a disabled or chronically ill beneficiary, and beneficiaries who are less than 10 years younger than the original IRA owner or 401(k) participant.

Please note that there is no longer a required minimum distribution for an inherited IRA.  The removal of this wording may cause a conflict in estate planning documents where a trust is named as the beneficiary.  Please review with your lawyer.

Annuities may now be purchased in 401(k) plans

This is a win for the insurance industry as annuities can now be sold to 401(k) plans.  We do not recommend annuities for most clients as they often carry hefty fees, are difficult to understand, and lock your money up for several years due to high surrender charges.

529 funds can now be used to repay student loan debt, up to $10,000

The SECURE Act allows for tax-free distributions from 529 plans, up to $10,000, to repay student loan debt.  Under the new law, a 529 plan may also be used to pay for certain apprenticeship programs.
This is a very brief summary of some of the important changes made in the SECURE Act.  Please feel free to call us to discuss how this new law may impact your specific financial situation.

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