By now you’ve probably heard of the SECURE Act and its impact on retirement plans. The purpose of the SECURE Act, which became law in late 2019, was to increase Americans’ access to retirement savings plans, but you may be directly impacted in other ways. Here are the top four changes that will affect most people and a few ideas to help you manage them.
- Required Minimum Distributions (RMDs) don’t begin until age 72, for those turning 70.5 after 12/31/2019. Once you turn age 72, you must begin withdrawals from your retirement plans based on your life expectancy. This is a year and a half later after the passage of the SECURE Act. The extra RMD-free time presents opportunities for income and tax planning that should not be ignored, such as Roth conversions and maximizing low income tax brackets. (Even better news: the CARES Act has eliminated all RMDs for the year 2020!)
- Qualified Charitable Distributions (QCDs) are still available at age 70.5, even if your RMD doesn’t begin until age 72. By using a QCD, you can transfer up to $100,000 to a qualified charity and the income is excluded from your taxable income.
- The “stretch” IRA has been eliminated for most non-spouse beneficiaries. If you inherited an IRA before 01/01/2020 (pre-SECURE Act), you may have been able to use your own life expectancy to stretch out the RMDs. This was beneficial if you inherited an IRA from a parent since your longer life expectancy meant smaller RMDs, less current taxable income and more investment growth within the IRA.
Post-SECURE Act, most non-spouse beneficiaries must distribute the account within 10 years instead of their own life expectancy. (See this companion post The SECURE Act and Retirement Plan Beneficiaries for a list of beneficiaries that are not subject to the 10-year payout rule.)
- Naming a trust as your beneficiary may no longer accomplish your estate planning goals. Your trust may require your beneficiary to take RMDs, which may now mean one lump sum payment after 10 years, effectively eliminating your original intent for establishing your trust. But not all beneficiaries are treated equally; some of your named beneficiaries (Eligible Designated Beneficiaries) may be able to stretch their distributions over their own life expectancy instead of the new 10-year distribution rule, and some may not (see this companion post The SECURE Act and Retirement Plan Beneficiaries for a list of Eligible Designated Beneficiaries).
Strategies for managing the SECURE Act:
- Multi-year tax planning: manage your taxable income whenever possible to create lower tax bracket years, and plan for Roth conversions in those years.
- Use Qualified Charitable Distributions to lower your taxable income.
- Roth conversions: Consider converting Traditional IRA money to Roth IRA to minimize the tax impact of the 10-year payout on your beneficiaries. Inherited Roth IRAs are still subject to RMDs, but the distributions will not be taxable to your heirs.
- Review your beneficiaries, especially if you have a trust named as your beneficiary.
Please contact Wingate Wealth Advisors if you’d like to discuss how the SECURE Act may affect you, or any of the strategies mentioned here.
Written by Andi McNamara, CFP® Director of Financial Planning at Wingate Wealth Advisors