What the new SECURE act means to you

December 26, 2019

Below are the five things that may apply to our clients and we'll be focusing our attention to these in the first part of 2020. [There are lots of exceptions and provisions to many of these rules but I want to keep this readable, so I will (mostly) leave the detail out – when you see a word such as "generally" or "basically" below, that's why.]

Most items of interest are in the SECURE Act portion (Setting Every Community Up for Retirement Enhancement Act of 2019) of the spending bill, but there are a few random things from elsewhere I'll include as well.

First, (under Section 401, Modifications to Required Minimum Distribution Rules), there is a detrimental change for many families. If you are planning to leave a retirement plan to your descendants, they will generally no longer be able to take the proceeds over their life expectancies, rather the maximum deferral period will be ten years.

Relevant details:

  • This does not apply to leaving the retirement plan to your spouse.
  • This does not apply to those who have already inherited a retirement plan.
  • If your estate planning documents leave your retirement account to a trust for the benefit of your heirs, we should re-evaluate that decision.
  • If your taxable (i.e. non-Roth, non-basis) retirement plan balances are likely to be high enough that withdrawing one-tenth each year for the ten-year deferral period would be enough to place your heirs into a higher income tax bracket than you are currently in, then Roth conversions for their benefit may be prudent.

Second, (under Section 114, Increase in Age for Required Beginning Date for Mandatory Distributions) there is a small, yet favorable, change. For those who are not yet 72, RMDs (Required Minimum Distributions) from retirement plans will now begin at age 72 rather than age 70½. QCDs (Qualified Charitable Distributions) continue to have a 70½ start age.

Third, (under Section 107, Repeal of Maximum Age for Traditional IRA Contributions) there is another small, yet favorable, change. For those over age 70½ who have earned income you can now contribute to an IRA.

Fourth, in the spending bill itself, but not the SECURE Act section we have been discussing, the change in the "kiddie tax" (basically tax on unearned income for a child under 18, or under 24 and a full-time student) that was made by the 2018 Tax Cuts and Jobs Act (TCJA) is repealed. Those earnings will again be taxed at the parent's marginal rate as they were previously rather than at trust tax rates.

Fifth, unrelated to this bill, but a recent development worth including here, beginning in 2021 the IRS is changing its life expectancy table for the calculation of RMDs. To use just two examples, previously an 80-year-old using the standard table would have used a life expectancy of 18.7 years but in 2021 it will be 20.2. A 90-year-old will change from 11.4 to 12.2. This means the required distribution will decrease from 5.35% to 4.95% at 80 and 8.77% to 8.20% at 90. Not a huge change, but a good one.