Banking / Financial

The Impact of the SECURE Act

The many benefits provided should make it easier to save for retirement.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into legislation on Dec. 20, 2019. Under the new law, taxpayers must begin making required minimum distributions (RMDs) by April 1 after they turn 72 years old. Under prior law, individuals were required to start making withdrawals at age 70½. The new provision may offer some relief to high-income taxpayers and those who continue to work past age 72. The SECURE Act also now permits employees over the age of 70½ to make contributions to an IRA.

Elimination of the stretch IRA: Perhaps the most significant impact of the SECURE Act is the elimination of the proverbial stretch IRA, which previously enabled IRA owners to pass the remaining account balance to a named beneficiary, who would then be offered an RMD schedule based on their life expectancy. However, the IRA now must be fully distributed to the eligible designated (non-spouse) beneficiary within a 10-year period following the IRA owner’s death.

This new law raises concerns about increasing individuals’ tax burdens and creating an opportunity for beneficiaries to mismanage the large lump-sum inheritance. Special exceptions to the 10-year rule apply to surviving spouses, minor children, disabled or chronically ill individuals, and those who are no more than 10 years younger than the decedent. This new rule will certainly impact the use of so-called conduit trusts, which are designed to have a mandatory distribution of RMDs over the lifetime of the beneficiary.

Other tax implications: Under the Tax Cuts and Jobs Act of 2017, the “kiddie tax” was amended to tax a dependent child’s unearned income at the rates applied to trusts and estates. The SECURE Act repeals that 2017 legislation as it relates to the rates of trusts and estates. Beginning in 2020, with the option to apply this policy to the 2019 tax year, the unearned income of a child is taxed according to the higher of the parents’ or child’s tax rate.

Additionally, tax-free distributions of up to $10,000 from a 529 plan can now be used to reduce or pay off a qualified education loan of the designated beneficiary (or his or her sibling). The pre-59½ distribution penalty of 10% can also now be waived for expenses up to $5,000 incurred within one year of the adoption or birth of a child.

An enhanced tax credit is also being offered to employers starting a qualified retirement plan, and the use of multiple employer plans (MEPs) is being expanded to mitigate the expenses associated with the creation and administration of a qualified retirement plan.

Overall, it’s important to consult your financial advisor to understand your specific circumstances.

About the Author

Paul Gaudio, CFP®, ChFC®, MST, is a wealth planning strategist and senior vice president at Bryn Mawr Trust’s Princeton-based Wealth Specialty office.

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