Your Financial Future

            On December 20th, the SECURE Act became law. It makes the biggest changes in American retirement in over a decade. While most of the changes were good, there are some provisions which could cause major issues for some retirees.  We discussed how this bill passed in the House of Representatives earlier this year with over 400 votes for and only three against.

            Congress realized that many Americans were not prepared for retirement. The SECURE Act makes it easier for small companies to work together to form retirement plans. This helps to reduce cost to small companies. It also allows part-time employees to participate in 401(k) plans. It also allows employees to keep contributing to IRAs after age 70 ½ if they continue to have earned income.

            Another important change is people will automatically be enrolled in retirement plans unless they opt out. This is important because fewer people receive pensions today than earlier generations. When you need to opt out instead of opt-in, more people participate and save for their future.

            The starting age for Required Minimum Distributions is increased to age 72. This clears up some confusion getting rid of the half year requirement. Now everyone will start the year they reach 72. People who were 70 ½ before the end of 2019 will continue using the 70 ½ requirement. Allowing people to wait an extra year and a half will be beneficial to most people.

            Often some pension income goes away at the death of the first spouse. We know one Social Security check will vanish. By allowing people to wait a little longer before starting RMDs your qualified money can grow more and be deferred from taxes. Remember, you can always take more out if necessary for living expenses; this is only required minimum distributions.

            The law makes no changes to Qualified Charitable Distributions (QCD).This is a provision of Trump’s tax code related to charitable donations for people who have RMDs. This means that people over 70 ½ can give their RMDs up to $100,000 directly to a qualified charity. You do not get a deduction on your tax return, but you do not have to recognize the income. This can be a very smart way to make contributions.

            While much of the SECURE Act is good policy, there are several parts that could become very expensive to some families. In the early 1990s, the stretch IRA became a popular estate planning option for people with large 401(k) and IRA balances. If structured properly, the balance could be stretched to younger family members. This meant that even though they had to start taking distribution over their life expectancy they could pay the taxes a little at a time. This allowed them to stay in lower tax brackets.

            The SECURE Act eliminates much of this strategy. Eligible Designated Beneficiaries are the only groups that are exempt from the new rules. This group is composed of Spousal Beneficiaries, Disabled Beneficiaries, Chronically ill, Individuals who are not more than 10 years younger than the decedent and certain minor children. These rules apply to deaths that occur on January 1, 2020.

            People not in the exempt group will have to take all of the inherited assets within ten years. They can take any amount out each year, but the total balance will become taxable no later than the 10th year. This will cause many adult children to recognize this inherited income during their own highest earning years. This will make taxes at higher rates payable to the government. In fact this is expected to generate billions of tax dollars over the next ten years. 

            These rules also apply to inherit Roth IRAs which must be distributed within ten years. This income will remain tax free. If a trust was named the beneficiary, they may have to be written to comply with the new law. There are a few other changes which we will deal with in a future column. Just be sure you realize the SECURE Act can be very expensive in certain situations and you need to be very proactive in your tax planning.

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