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Will the SECURE Act Affect You?

By Karen McMillan, CFP
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Individual Retirement Accounts (IRAs) have been modified many times since their introduction forty-six years ago in 1974.  Many of the changes have been beneficial – the contribution limits have increased from the original annual amount of $1,500 up to $6,000 in 2020 (unchanged from 2019); in 1986 the addition of non-deductible contributions expanded the access of tax-sheltered savings, and also included the ability to contribute for non-working spouses; the Roth IRA was created in 1997; and in 2001 the $1,000 over age 50 catch-up provision was added. 

By 2006, attention seemed to shift to money out of IRAs and the Qualified Charitable Distribution (QCD) legislation was enacted, providing for the tax-free withdrawal of IRA funds to qualified charities.  Although a very useful tax planning tool, it was not well utilized and very difficult to plan around.  The QCD rule was temporary, lapsing and being reinstated for almost ten years until it was finally made permanent in 2015.  In 2010, the $100,000 AGI income restriction for Traditional IRA conversions to Roth IRAs was removed, opening another avenue for strategic IRA withdrawals, although these conversions create an immediate tax liability, unlike the tax-waived QCD withdrawals.  

Now, almost a decade later, one of the most significant pieces of retirement plan legislation was passed as part of the $1.4 trillion appropriations bill; the Setting Every Community Up for Retirement Enhancement Act, also known as the SECURE Act.  Many of the rule changes pertain to employer retirement plans.  In this article however, I specifically address some of the changes that are more applicable to individual investors, such as the changes to withdrawals from Inherited IRAs, the new start age for Required Minimum Distributions (RMDs), and others.

Perhaps the change with the most impact is the new regulations concerning the withdrawal from Inherited IRAs. The new rules come into effect for beneficiaries of IRA accounts whose owner passes away in 2020 and years forward.  A beneficiary of an IRA account whose owner passed away in 2019 will not be subject to the new rules, even if the Inherited IRA account paperwork and transfer will not be complete until 2020.  Other IRA account beneficiaries who will not be affected by the new rules are spouses, disabled beneficiaries, chronically ill beneficiaries, and beneficiaries not more than 10 years younger than the deceased IRA owner.  Minor children are exempted from the new rules until they reach the age of majority.

The Inherited IRA balances must now be completely withdrawn by the end of the 10th year following the year of inheritance, as opposed to annual withdrawals over the lifespan of the non-spouse beneficiary.  The 10-year withdrawal requirement completely replaces the other distribution requirements, meaning that there are no minimum distribution requirements, withdrawals can be made at any time, in any amount, provided that the account is completely liquidated within the 10-year time requirement. 

The new rules also apply to both Conduit and Discretionary Trusts, and could potentially be quite negative for beneficiaries of some conduit trusts if written to only provide distributions to the beneficiary when required. Now that the annual withdrawal distribution requirement is gone, the beneficiary might be prevented from taking any distributions until being forced to take 100% of the amount in the 10th year.  Your Osborne Partners Portfolio Counselor will be happy to work with you and your estate attorney to review trusts named as IRA account beneficiaries.

One positive legislation change was the delay to age 72 of the Required Minimum Distributions (RMDs) from IRA plans.  In a small move toward simplicity, the new age to start taking an RMD is 72, not 70 and one-half.  This change applies only to people who turn 70½ in 2020 or later, in other words, people born July 1, 1949 and later.  This delay of the withdrawal start date is an acknowledgment of today’s longer life expectancies, which incidentally corresponds with another not-yet-passed proposal that, if passed, will update the three different life expectancy tables starting in 2021, resulting in lower RMDs. This would be the first update of the life expectancy tables in almost 20 years.

How, you may ask, will that impact the Qualified Charitable Distribution, which allow using one’s RMD for tax-waived charitable donations starting at age 70½?  The surprising answer is not at all, and I am sure that many charitable organizations are breathing a sigh of relief.  People born July 1st, 1949 and later may still donate using qualified charitable distributions from their IRA beginning at age 70½, even though they will not have a required minimum distribution.  Also, important to note, QCDs are taken from pre-tax IRA contributions, unlike all other withdrawals that take a pro rata amount of earlier deductible and non-deductible contributions.    

Which leads us to another change in the rules.  Until the SECURE Act was passed, contributions into a Traditional IRA were prohibited at once reaching age 70½.  That limit has now been removed and Traditional IRA contributions are now allowed for as long as there is earned income to support them. This places Traditional IRA accounts on an equal footing with other retirement accounts, such as SEP IRAs and 401(k) plans that allow for continued contributions past age 70½. 

Beware however; if you are 70½ years old and you are using your IRA to make Qualified Charitable Distributions while also earning income and making contributions into your IRA, not all of your charitable donation will qualify as tax-waived.  Some percentage of it will end up being taxed as income and will need to be claimed as an itemized deduction.  But, unless you are part of the now only 10% of the filing population who have sufficient deductions to file a Schedule A, the charitable deduction will be lost for federal tax deduction purposes.  Lost that is until the 2026 tax year when many provisions from the 2017 Tax Cuts and Jobs Act sunset, and we drop back to the pre-2017 legislation, barring any extensions.     

The new law also allows for the penalty-free, but still taxable, withdrawal of up to $5,000 from a retirement account within the year after a child’s birth or adoption, and notably, there is a provision that allows for the repayment of the withdrawal.  (Treasury Regulations with exact repayment rules expected soon.)

Each tax change sets us, your Osborne Partners Portfolio Counselors, to work, sifting through the rules to be able to help you assess the impact on your personal situation, and to provide guidance on any strategies that could be beneficial towards reaching your objectives.  Please feel welcome to meet with your Portfolio Counselor and explore any effect the new tax law might have for you.  In the meantime, please look over the below list of broad recommendations to identify any that may be applicable for you.    

· Review IRA beneficiary designations within the context of your overall estate plan and other expected estate assets

· Consider using the Qualified Charitable Distribution rules to remove money from your IRA, particularly if you have an after-tax balance

· Consider making Roth conversions of your IRA assets

· Consider spending down your IRA while growing your non-retirement accounts

· Consider contributing to your IRA after 70½ if you have earned income and after determining your charitable gifting strategy

Karen McMillan, CFP

Karen McMillan, CFP

Karen is a Portfolio Counselor at OPCM with over 20 years of experience in the financial services industry. She has a broad range of experience that includes working with clients on comprehensive financial planning, wealth management strategies, stock option strategies, tax planning, and insurance. Over her two decades she has not only become a CERTIFIED FINANCIAL PLANNER™ practitioner (2006), but has accumulated ten additional professional qualifications.
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