A recently passed federal law brings significant changes to how Americans invest for retirement and access retirement assets. On Dec. 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act into law. The SECURE Act represents some of the most substantial changes to retirement planning in years and took effect Jan. 1, 2020.
Matt Teich, CFA, CFP®, Partner & Managing Director with Cresset, shares three key aspects of the SECURE Act that are of interest to affluent and high-net-worth individuals:
Stretch Provisions for Non-Spouse IRA Beneficiaries Limited to 10 Years
Perhaps the most significant aspect of the SECURE Act is a change in how long non-spouse individual retirement account (IRA) beneficiaries have to take distributions. Previously, a child or other non-spouse IRA beneficiary could take distributions over that person’s expected life time – potentially several decades for a younger beneficiary. The SECURE Act now limits that time frame to 10 years after the death date of the original IRA holder. Distributions can take place at any point during that period, but must be exhausted by the end of the 10 years.
“This is not great news for beneficiaries, particularly younger people, since they will lose out on potentially decades of tax-deferral, and the taxes on distributions will be due sooner and in relatively larger amounts,” Teich explains. “Additionally, any IRAs with a trust named as a beneficiary should be revisited, as those could be negatively impacted by the new rules.”
Required Minimum Distribution (RMD) Age Rises to 72
With the SECURE Act, the age at which RMDs from IRA accounts must be taken increases from 70.5 to 72 years. That change provides investors without an immediate need for income to remain invested, while delaying the tax impact of taking distributions. It is worth noting that Qualified Charitable Distributions (QCDs) can still take place at age 70.5, allowing people to give up to $100,000 in IRA assets directly to qualifying charities. As before, a QCD can help manage someone’s taxable income for the year, while potentially lowering future RMD amounts. That in turn can mean a lower tax hit.
In addition, the SECURE Act repeals the age restriction on contributions to traditional IRAs. Beginning in 2020 and beyond, people who are working can make contributions after reaching age 70½.
“Kiddie Tax” Reverts Back
While not specifically related to retirement planning, the SECURE Act also reverts the “kiddie tax” back to what it was prior to the Tax Cuts and Jobs Act of 2017. For children with unearned income, such as from invested assets, they will once again be taxed at their parents’ top marginal tax rate. As part of the Tax Cuts and Jobs Act of 2017, that tax rate had changed to align with trust tax brackets.
“What makes this change so significant is the enormous difference in tax rates between trusts and individuals. The marginal tax rate for married couples filing jointly in 2020 doesn’t hit the highest level of 37 percent until income exceeds approximately $622,000. For trusts, that 37 percent tax rate occurs at a mere $12,950. That’s a huge difference,” Teich says.
Regardless of one’s level of wealth, Teich recommends revisiting beneficiary designations. Particularly for those who are approaching retirement, now is the time to meet with financial advisors to explore the potential ramifications of the SECURE Act.
