2020 UPDATES – The SECURE Act and More
The new year brings several significant changes to retirement plans and our tax system. Most of the changes noted below are included in the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The SECURE Act was a relatively small component of a lengthy appropriations bill that became law in late December 2019.
The following summary is a brief overview of the changes we believe will have the greatest impact on Bigelow clients. As always, please consult your financial professionals before acting on any general information.
Elimination of Stretch IRAs for Most Non-Spouse IRA Beneficiaries
This change only impacts retirement accounts owned by individuals who pass away after December 31, 2019. Existing Inherited IRA accounts are not affected.
Beginning this year, beneficiaries of retirement accounts will need to distribute the entire account by the 10th year following the year of inheritance. This will apply whether or not the original account had already started taking the Required Minimum Distribution (RMD).
This change will not apply to certain groups, called “Eligible Designated Beneficiaries”. This group includes:
- Surviving spouse
- Minor child, prior to age of majority
- Disabled or chronically ill beneficiaries
- Individuals not more than 10 years younger than the account owner
A common planning scenario involves a child inheriting a parent’s IRA while the child is late in their working years. If the non-spouse beneficiary is due to retire within the ten-year window, a general planning recommendation under the new law may involve delaying any distributions until retirement, when the beneficiary is likely to be in a lower marginal tax bracket.
Increase in Age for Required Beginning Date for Mandatory Distributions
Individuals and spousal beneficiaries will now be able to delay taking RMDs from their retirement accounts until age 72. An individual may still delay the first distribution to April 1st, following the year that they reach age 72.
This change applies to distributions that will be made after December 31, 2019, with respect to individuals that attain age 70 ½ after December 31, 2019. For example, an individual that turned age 70½ in December 2019 will still need to take an RMD in 2020, even though they will not be 72 in 2020.
Interestingly, Qualified Charitable Distributions will still be allowed from retirement accounts at age 70 ½. Individuals can still give up to $100,000 per year directly from their IRA to charity.
Changes to Kiddie Tax System
Unearned income that is subject to the “Kiddie Tax” will be taxed at the parent’s marginal tax rate. This is essentially a reversal of the law that was passed two years ago in the “Tax Cuts and Jobs Act”, which subjected the income to trust tax rates.
This change goes into effect for tax year 2020, but also allows individuals the option to retroactively apply it to tax years 2018 and 2019 if they would like to explore amending a prior return.
Repeal of Maximum Age for Traditional IRA Contributions
This is a straightforward change. Other factors may limit an individual’s ability to contribute, such as not having any earned income, but age will no longer be a restriction. (Previously, individuals were prohibited from contributing to a Traditional IRA once they reached 70 ½.)
Changes to the 529 Plan System
Beneficiaries may distribute up to $10,000 to pay principal and interest on student loans for the beneficiary of the account or their siblings.
It should also be noted that the Maine 529 program has made some changes to its grant system. Participants should be aware that annual contributions must now total $1,000 (previously $600) in order to receive the maximum matching grant of $300 per year. This change is not part of the SECURE Act, but it is important to note.
Other changes include allowing up to $5,000 in penalty-free retirement plan distributions for a birth or adoption and requiring certain retirement plans to allow part-time workers to participate if they have worked 500 hours in three consecutive years.
Some of the most significant and complex changes affect employer-sponsored retirement plans, with a focus on promoting lifetime income solutions within plans. Those changes are outside the scope of this article but are important and will be felt by many of our clients in the coming months.
Please reach out to your advisor at Bigelow with any additional questions regarding these changes. We look forward to hearing from you and welcome discussing the financial planning opportunities that these changes present.