The SECURE Act - What You Need to Know
The “Setting Every Community Up for Retirement Enhancement” (SECURE) Act was signed into law on 12/20/2019 with many changes becoming effective on 1/1/2020. These changes will have some major impacts on retirement savings and distributions.
- Required Minimum Distributions (RMDs) – The age you must start taking required distributions from retirement plans changes from 70 ½ to 72. If you turned 70 ½ in 2019 or earlier, you must continue taking your RMD. Only those who turn 70 ½ in 2020 or later may wait until age 72 to begin taking their RMD.
- Contributing to an IRA – Previously, if you were over age 70 ½, you could not contribute to an Individual Retirement Account (IRA). Beginning with the 2020 tax year, if you are over 70 ½, you can contribute to an IRA, if you have earned income.
- Inherited IRAs – If your spouse is the beneficiary of your IRA, they can choose to roll it into their IRA and take distributions over their lifetime. This has not changed. However, if your IRA beneficiary is a non-spouse, such as your child or grandchild, the SECURE Act requires them to take distributions over a maximum of 10 years.
Prior to this change, non-spouse beneficiaries could receive IRA distributions over their lifetime, allowing a young beneficiary to potentially stretch distributions over many decades. IRAs inherited by a non-spouse prior to 2020 can continue to benefit from the old law.
There are a few exceptions to this 10-year payout period. If an IRA owner’s minor child is the beneficiary, required distributions would still be determined by the minor’s longer life expectancy (and thus, a smaller required distribution) until the minor is an adult, or up to age 26, if the child is still in school. At that point, the 10-year payout would begin.
- Charitable Distributions from IRAs – Currently, people who are over 70 ½ can distribute money from their IRA to a charity and exclude the distribution from their taxable income. Nothing changes with regards to this provision.
- Penalty-Free Withdrawals – If you are under the age of 59 ½ and withdraw money from a traditional IRA, you pay income tax on the amount withdrawn plus a 10% early-withdrawal penalty. Currently, there are a few exceptions to the 10% penalty, such as qualified education expenses, buying your first home, certain medical expenses, etc. The SECURE Act adds another exception: up to $5,000 can be withdrawn upon the birth or adoption of a child. But this should only be used as a last resort, as you would still pay taxes on the amount withdrawn, and that money is no longer invested for the future.
- Trusts as Beneficiaries – Trusts are often used as contingent beneficiaries for retirement accounts in lieu of naming minor children or grandchildren. While trusts remain an excellent planning tool, as a result of this change, the language in some trusts may create some additional tax headaches.
- 529 Plans – These plans are popular for accumulating funds for future college expenses. The SECURE Act added two new types tax-free qualified expenses from 529 Plans: Apprentice program expenses and up to $10,000 in qualified education loan repayments now qualify.
If you have any questions about how these changes affect your retirement plan, please feel free to contact us at Townsend Asset Management Corp.
Gerald A. Townsend, CPA/PFS/ABV, CFP®, CFA®, CMT is president of Townsend Asset Management Corp., a registered investment advisory firm located in Raleigh, North Carolina. Email: Gerald@AssetMgr.com
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented, nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. Townsend Asset Management Corp. is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about the firm can be found in its Form ADV Part 2, which is available upon request. TAM-19-23.