Summarizing the SECURE Act
Only two years after Congress gave us sweeping changes with the Tax Cuts and Jobs Act, we now have the Setting Every Community Up for Retirement Enhancement "SECURE" Act (it was included as part of the spending bill). Passed and signed just days before Christmas, we find that there are some goodies, as well as some lumps of coal. There was also a tax extenders bill passed. This post will break the SECURE Act into its Retirement and Non-Retirement provisions and then separately list the Extenders. This is only a portion of the law that is deemed most relevant for clients.
SECURE Retirement Provisions
"Stretch" Retirement Accounts
Starting with a lump of coal, the "stretch" retirement account is dead. Or, more accurately, and to steal a quote from The Princess Bride, it's mostly dead. Briefly, current law allows designated beneficiaries to stretch distributions over their life expectancy (or in the case of a qualifying trust, over the oldest applicable trust beneficiary’s life expectancy). This means distributions could be spread out for many years, even decades, in the case of younger beneficiaries. The new rule says most designated beneficiaries who inherit in 2020 (i.e., where the retirement account owner themselves dies in 2020 and beyond), the new standard under the SECURE Act will be the ‘10-Year Rule’.
Under this 10-Year Rule, the entire inherited retirement account must be emptied by the end of the 10th year following the year of inheritance. Similar to the existing 5-year rule for non-designated beneficiaries, though, within the 10-year period, there are no distribution requirements. Thus, designated beneficiaries will have some flexibility and planning opportunity when it comes to timing distributions from the inherited account(s) for maximum tax efficiency… as long as the entire account balance has been taken by the end of the 10th year after death. Hence the "mostly" dead.
Exceptions to the new 10-Year Rule are as follows:
- Spousal beneficiaries
- Disabled beneficiaries
- Chronically ill beneficiaries
- Individuals who are not more than 10 years younger than the decedent
- Minor children (of the original retirement account owner), but only until they reach the age of majority, at which time they must begin the 10-year period.
For these eligible designated beneficiaries, the rules stay the same as they've been. They can take distributions over the beneficiary’s life expectancy (and spousal beneficiaries may still do a spousal rollover as well). So, the coveted ‘Stretch’ will only live on via a small percentage of post-2019 beneficiaries.
This rule change will create some challenges for trusts named as retirement account beneficiaries. This is an already complex area of tax and estate planning. Naming a trust as retirement plan beneficiary is a balancing act of tax planning and planning for the protection of plan assets from beneficiaries and/or their creditors. Much more will be written in the days ahead on this subject.
Required Minimum Distributions (RMDs) to Begin at 72
The RMD starting age will move from 70.5 to 72. This is a small change, but will allow those who don't need their retirement distributions to delay them for 1 or 2 years. Those born in the first half of the year will get a 2 year delay, those born in the 2nd half of the year only receive a 1 year delay. This change only affects those attaining age 70.5 in 2020 or later. If you turn 70.5 before 1/1/2020, old rules apply.
Qualified Charitable Distributions (QCDs) Still Allowed at 70.5
An interesting provision (to the extent that any of this can be interesting) is that the QCD age will remain at 70.5 while the RMD age moves to 72. For those charitably inclined, the QCD is a wonderful giving strategy, especially for those whose standard deduction is higher than itemized deductions, including charitable gifts. QCDs remove the retirement distribution from taxable income altogether. For those that can still itemize and have been giving appreciated securities to charities, it will take some figuring as to whether it's better to give appreciated securities or QCDs, particularly during the 1-2 year period where there isn't a RMD but a QCD is available.
Traditional IRA Contributions No Longer Prohibited Post-Age 70.5
This brings IRAs more into conformity with other retirement accounts. Basically, if there is earned income (or spousal income in the case of Spousal IRA contribution), you can continue to make Traditional IRA contributions.
Anti-abuse Provision Coordinates Post-70.5 Contributions and QCDs
Because Congress knows financial planners are a clever bunch, they went ahead and shut down the opportunity to make QCDs from post-70.5 contributions. Therefore, any QCD will be reduced by the cumulative amount of total post-70.5 IRA contributions (but not below $0) that have not already been used to offset an earlier QCD.
Other Retirement Provisions
Numerous other provisions, highly summarized:
- Protection for plans that provide for lifetime income options to retirees via annuities
- Larger tax credits for small businesses that establish a retirement plan
- New credit for adoption of automatic plan enrollment by a small business
- Part-time workers that have worked at least 500 hours in at least three consecutive years will be eligible to participate in their employer's retirement plan (old rule is at least 1,000 hours in one year, which will remain in effect, making eligibility a dual entitlement system). The idea is to bring more part-time workers into the employer plan space, but note that this isn't effective until plan years beginning 2021, so the earliest eligibility under the new 500 hour test is 2024. Also, note that individuals included under this provision will be excluded from nondiscrimination testing calculations since their contributions are likely to be small and provide difficulties in the plan meeting nondiscrimination tests as they currently exist.
- Multiple Employer Plans (MEPs) easier to form by removing some existing barriers
SECURE Non-Retirement Provisions
529 Plan Qualified Education Expenses Expanded
529 plans can now be used to pay for Apprenticeship Programs that include fees, books, supplies and required equipment, provided the program is appropriately registered and certified with the Department of Labor.
529 plans can now be used to repay principal and/or interest of qualified education loans and are limited to a lifetime amount of $10,000 (not adjusted for inflation). Any plan funds used to pay the interest on qualified student debt will make that interest paid ineligible for the above-the-line deduction for student loan interest.
Kiddie Tax Reverts to Pre-Tax and Jobs Cuts Act Rules
Prior to the TCJA, any income of a child subject to the Kiddie Tax was taxed at the parents' marginal tax rate. Two years ago, the TCJA made that income subject to trust tax rates. The SECURE Act changes this back to the parents' marginal rate. While the change is effective for 2020, taxpayers can elect to apply the old rules to the current 2019 tax year, and back to 2018 as well! For those subject to the Kiddie Tax, number crunching will need to be done to determine the best option for 2019, as well as whether it would be worth amending a 2018 return.
In a ridiculous annual ritual, Congress came through with the “Taxpayer Certainty and Disaster Relief Act of 2019”. Using the word "Certainty" in the title of an Extenders bill is laughable, given that the only certainty is that these items are temporary and we will be left wondering into late next year whether they will be extended again. Anyway, the following tax benefits for individuals are reinstated retroactively to 2018 (again, need to weigh the benefit of amending 2018 returns), and made effective only through 2020:
- The exclusion from gross income for the discharge of certain qualified principal residence indebtedness;
- Mortgage insurance premium deduction; and
- Deduction for qualified tuition and related expenses.
Additionally, the AGI ‘hurdle rate’ that must be exceeded to deduct qualified medical expenses remains at 7.5% of AGI for 2019 and 2020.
Also, there are retirement-related provisions in the way of qualified disaster distributions from retirement accounts. For those who qualify by having a principle residence and losses in a Federally declared disaster area, up to $100,000 can be distributed from a retirement plan and receive special treatment regarding tax penalties, mandatory withholding, election to spread the tax and the ability to payback the distribution.
For a more extensive, but still limited discussion, please see Michael Kitces' blog.
Any information presented here is general in nature, believed to be reliable as of the date published and is not intended to be and should not be taken as legal, tax, investment or individual financial planning advice. Competent, licensed professionals should be consulted when implementing any kind of financial, estate, tax or investment strategy.