Published in the Bradenton Herald 12/30/19
Just in time for Christmas, HR 1865 SECURE Act was passed on December 20, 2019. There are 29 separate provisions contained in the Act, “Setting Every Community Up for Retirement Enhancement”. Many of the provisions impact retirement plans such as 401ks and 403bs, but today I’m just going to focus in on the key issues that impact those who have already retired.
Required Minimum Distributions (RMD’s) have been pushed back from age 70 ½ to age 72. This is good news to those who prefer to defer taking from their retirement accounts. The Required Beginning date is the year you become age 72 or April 1st of the following year. If you wait until April 1st then you must take 2 RMD’s that year. One is for turning 72 by April 1st and the 2nd by December 31st for being age 73. This should be a little easier to calculate than the former 70 ½ provision.
The additional 1 ½ years provided by this rule provides some great planning opportunities. A lot of planning for the 60 – 70 year old cohort is around deferring social security and bleeding out retirement accounts through mini roth conversions in attempt to avoid excess ordinary income that will come in your 70’s due to RMDs.
RMD’s can drive incremental taxes through increased taxation of social security, triggering Medicare IRMAA breakpoints, adding a potential Medicare 3.8% surcharge and pushing up capital gains rates. By pushing back RMD’s by 1 – 2 years we gain additional time to adapt the asset mix of taxable, tax-deferred and tax-free accounts to better address these obstacles.
Qualified Charitable Deduction (QCD) elections can still start at 70 ½.For those who are charitably inclined, QCD’s in lieu of your RMD are often the most tax efficient means to give money to causes you care about. The SECURE Act does not make you wait until 72 in order to use this provision. If you just turned 70 ½ and had intended to use the QCD provision before year end or in 2020 you may continue to do so.
You can contribute to a traditional IRA after 70 ½.If you have earned income from a part time job or self-employment, you can now continue to make contributions beyond your RMD years. While you could make Roth contributions before now you have the option of either. You can further increase contributions through a profit-sharing plan like a 401k plan and thereby reduce the impact of Medicare and social security taxation discussed above through your 70’s and beyond.
Non-spouse beneficiaries are now subject to a 10 year distribution rule.They say there is no such thing as a free lunch and the SECURE Act has a catch. In exchange for the benefits received, Congress has eliminated the stretch IRA. Proceeds from the removal of this provision are projected to be north of $15.7 billion.
Prior to 2020 the non-spouse beneficiaries of an IRA could “stretch” distributions from an IRA over their own life expectancies or in the case of a conduit trust over the oldest beneficiary’s life expectancy. Under the Secure Act the new standard (beyond spouses and a few exceptions) is that the account must be distributed within a 10 year period.
Assess your estate and tax planningThe SECURE Act is the largest change to retirement rules since the Pension Protection Act of 2006. It is unlikely that there isn’t some provision that will have an impact on your retirement and / or estate plans. Now is a good time to review, assess and modify your retirement and estate plans to address the changing landscape of taxes as Congress seeks to address the influx of retiring baby boomers. Can you take advantage of this plan to reduce taxes and enhance your retirement plans? Can your beneficiaries manage the tax implications of inheriting your IRA? I’m told prevention is worth a pound of cure. Happy Holidays.
Gardner Sherrill, CFP, MBA, is a CERTIFIED FINANCIAL PLANNERTM with Sherrill Wealth Management. To learn more visit sherrillwealth.com. The opinions expressed in this material are not intended to provide specific advice or recommendations for any individual. Securities and advisory services offered through LPL Financial a registered investment advisor. Member FINRA/SIPC.