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Will the SECURE Act Affect Your Clients’ Financial Plans?

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On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act). The new law has the laudable goal of expanding opportunities for individual retirement savings. However, several key changes made by the SECURE Act may affect your clients’ retirement and legacy plans, requiring possible reconsideration and adjustments.

Age Restriction for IRA Contributions Eliminated

Old Law: No traditional IRA contributions are allowed in the year the IRA owner turns 70½, or any subsequent years.

New Law: For tax years 2020 and beyond, contributions to traditional IRAs are allowed at any age.

Charitable Implications—Qualified Charitable Distributions (QCDs): QCDs of up to $100,000 are allowed once the owner of the IRA reaches 70½ (age unchanged). If the IRA owner requests a QCD in the same year that a deductible contribution is made, the QCD is decreased by the amount of the deductible portion of that contribution.

Age Change for Mandatory Required Minimum Distributions (RMDs)

Old Law: An initial RMD was required in the year the IRA owner turned 70½. (The owner is allowed to postpone to April 1 in the following year if two RMDs are taken in that year.) For all subsequent years, the IRA owner must take an RMD by Dec. 31.

New Law: The SECURE Act increases the age for the initial RMD from 70½ to 72. This change only affects those who reach 70½ after 2019. Therefore, if an IRA owner reached 70½ in 2019 or earlier, they will be unaffected by the changes in the SECURE Act.

“Stretch IRA” Elimination

Old Law: Designated beneficiaries (individuals and some qualifying trusts) are eligible to stretch distributions from inherited IRAs over their lifetime.

New Law: Under the SECURE Act, non-spousal beneficiaries are required to fully withdraw an inherited IRA within 10 years of the owner’s death. This new 10-year rule applies to all inherited accounts (traditional and Roth) for deaths occurring after 2019.

There are exceptions to new 10-year rule for certain beneficiaries. Eligible designated beneficiaries include:

  • Surviving spouse
  • Minor child of deceased account owner. Once child reaches the age of majority, the account must be distributed within 10 years.
  • Beneficiary no more than 10 years younger than the deceased account owner
  • Chronically-ill or disabled individuals [as defined under IRC 7702B(c)(2) and 72(m)(7), respectively]

Life Insurance as a Hedge
For many retirees, IRA accounts represent a majority of their accumulated wealth. With the elimination of the tax-deferring “stretch” provisions, many IRA owners who intend to pass on their IRA to adult children or grandchildren may find that funding a life insurance policy—with its tax-free death benefit—with IRA distributions to be the most tax-efficient method for leaving a legacy.

Penalty-Free Distributions for Birth or Adoption

Old Law: Prior to the SECURE Act, any IRA withdrawals for the birth or adoption of a minor child prior to the IRA owner reaching 59½ would result in a 10% early withdrawal penalty.

New Law: The SECURE Act eliminates the 10% early withdrawal penalty for IRA withdrawals up to $5,000. To satisfy the requirements of early withdrawal, the IRA owner must initiate the withdraw of the funds within one year following either the birth or adoption. Thus, withdrawals made before birth or before the adoption has been finalized will still result in a 10% early withdrawal penalty.

Student Loan Repayment from 529 Accounts

Old Law: Student loans repayment from 529 accounts were ineligible.

New Law: : The SECURE Act allows up to $10,000 total (not annually) to be distributed for student loan repayment purposes. Furthermore, the law also allows distributions from 529 plans for student loan repayments to siblings of account beneficiaries.

Please watch for our next SECURE Act update, where the effects on businesses will be discussed in depth. As always, if you have any questions about the SECURE Act or how it may affect your clients, please contact our Advanced Planning team at advancedplanning@highland.com.

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