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Home Blog Key Secure Act Impacts to Know for 2020

Key Secure Act Impacts to Know for 2020

Key Secure Act Impacts to Know for 2020

With a new year, comes new laws effective January 1, 2020. In December 2019, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) was signed into law making way for changes that have a real impact on retirement and estate planning. Here are some key takeaways and what they may mean for you:

RMD delay to age 72.
From 1975 to 2019, an individual was required to begin taking Required Minimum Distributions (RMDs) from their Traditional IRA, SEP IRA, Simple IRA, and 401k/403b plans at age 70½. Beginning in 2020, the age is now 72. However, if you attained age 70½  by December 31, 2019, you must continue to take RMDs for 2020 or 2021 even if you are age 72.  

What does this really mean? Uncle Sam is letting you keep your money growing longer. Recall, when you take out your RMDs you pay income tax. 

Contributions after starting RMDs.  
From 1975 to 2019, an individual was ineligible to make a Traditional IRA contribution the year in which RMDs began. Beginning in 2020, if you are earning income, you remain eligible to contribute to an IRA.

What does this really mean? With our population living longer and longer (and thus often working longer and longer) more years to save up for retirement is great on its own. Contributions generally lower your taxable income. Thus, if you are working and in RMD status, Uncle Sam may have just given you a raise.

Birth or Adoption Penalty Free withdrawals.   
Individuals can now withdraw up to $5,000.00 from their retirement funds to defray the costs associated with a qualified birth or adoption of a child.  This is a lifetime limit. Payment back into the plan is allowed and considered an eligible rollover.

What does this mean? If you are expecting in 2020, you are eligible to take up to $5000.00 from your retirement to pay the costs without paying a penalty. In the past, this type of withdrawal would have resulted in a 10% penalty.  

Elimination of the “Stretch”.  
The “stretch” provision on most nonspouse-inherited IRAs and retirement accounts has been eliminated for anyone inheriting from an account owner that passes away after December 31, 2019. In the past, many beneficiaries stretched distributions over their own life expectancy minimizing the tax hit and extending the time the funds could grow tax-deferred. With the new law, most beneficiaries are required to take distributions in 10 years.  There are no RMDs but rather, all funds must be distributed and account closed at the conclusion of the 10 year window.  

What does this mean? Although most provisions of the new law result in tax benefits, this provision may cost you (or more likely, your beneficiaries). The potential tax implications for beneficiaries of large retirement accounts could be significant. By requiring all funds out within 10 years, the income is less spread out resulting in higher tax. Also, be wary of waiting until the last year as it could push you to a higher tax bracket. This also means you might want to rethink your estate plan. If you were relying on tax benefits to persuade your beneficiaries to hold onto the funds longer, this may no longer work. If your goal is to provide for lifetime income to your child, you might want to consider a charitable remainder trust.

Estate planning and strategies such as Roth conversions during lifetime become even more important with this change. Several exceptions are carved out for the surviving spouse, a minor child, a disabled individual, a chronically ill individual or an individual not more than 10 years younger than the account holder.    

Trusts as Beneficiary of IRA or 401k need review.  
A common tool in estate planning is to take advantage of a “pass-through” trust to achieve creditor protections while benefiting from stretch provisions by passing through RMDs to the beneficiaries. Often the trust language specifies the beneficiary only has access to the RMD each year. At the time the document was drafted it would have been contemplated that the Trustee would stretch the RMDs over the lifetime of the beneficiary. With the new 10 year rule, the result of this language could require the funds to be held 10 years and then all distributed in year 10, which is unlikely to be the goal of the Grantor as it results in poor tax planning and does not give a lifetime income stream to the beneficiary as intended.

What does this mean? It is an ongoing debate if naming a revocable trust as the beneficiary of an IRA is a good idea. The trust needs a properly drafted “pass-through” provision and different custodians may handle differently. If you named a Trust as a beneficiary of your IRA or 401k prior to the SECURE Act, you should consult your attorney to determine if it still makes sense and to make sure the language doesn’t create a poor tax outcome. Again, if the goal is to provide for lifetime income, it may be a good time to consider a charitable remainder trust.

Increase in Small Employer Savings Benefits.   
There are several ways in which the new law could impact small employer retirement plans. They include:

  • Multiple Employer Plans (MEPs) will allow employers to more easily join together to offer retirement plans. In past, MEPs required a common interest and compliance was burdensome due to the “One Bad Apple” rule precluding the full use of this type of plan. Those two barriers were eliminated in the Secure Act. Additionally, the DOL is tasked with creating simplified reporting for MEPs that cover fewer than 1,000 employees as long as each participating employer has less than 100 employees in the plan.
  • Tax credit for creating and maintaining a retirement of as much as $5,000.00. Small employers may also receive an additional credit of up to $500/year for up to 3 years by including automatic enrollment.
  • The Act also extends the adoption deadline for a specific tax year to the due date for the employer’s tax return. Thus, the need to reduce taxes, either at a corporate or individual level, may encourage more business to start retirement plans.

What does this mean? Employers, especially small employers, should consider whether now is the time to create a retirement plan or review an existing plan. The Act could make it simpler and less costly. Add to that the fact we have record low unemployment, adding or improving employee benefits is a smart goal for businesses in 2020.

Small Loan Repayment Becomes a qualified 529 expense. 
If you have a 529 plan, you can now withdraw up to $10,000.00 to pay back student loan debt. 529 plans are tax-advantaged accounts designed to save for college. Prior to 2020, student loan repayment was not a qualified education expense.  

What does this mean? The expansion provides an opportunity for students to keep contributing to a 529 plan throughout college or after graduation to pay down loans. Additionally, grandparents now have a mechanism to help a grandchild pay for college without affecting financial aid eligibility. Distributions from a grandparent-owned 529 plan are considered untaxed student income on the Free Application for Federal Student Aid (FAFSA) and can reduce a student’s financial aid package by up to 50% of the value of the distribution. However, by waiting until January 1 of the student’s sophomore year of college to take a 529 plan distribution or waiting until the student graduates to pay down their student loans, FAFSA will not be negatively impacted. This works because the year of income considered on the FAFSA is two years prior to the award year.

Reduction of the Kiddie Tax.
The Act repeals the changes made to the kiddie tax in the Tax Cuts and Jobs Act returning the expenses subject to the tax to their original lower rates (parent’s tax rate) instead of the much higher trust and estates rates. In 2018, individuals who paid the higher tax in returns filed for the 2018 tax year can file amended returns seeking refunds.

What does this mean? If you are a minor or a student between 19 and 23, unearned income- including interest, dividends and taxable scholarships, is taxed at a lower rate. This should benefit low and middle-income families, especially those receiving survivor benefits.

Whether you are an individual or an employer, we can help evaluate the impact of these changes on your current planning. Call us at 641-422-1600 or email to schedule an appointment today.

Article provided by Chief Wealth Management Officer Nicole Olson.

Products provided by First Citizens Wealth Management are not insured by the FDIC, are not deposits of the bank and are not guaranteed by this institution; and, are subject to investment risks, including possible loss of the principal invested. Please note that neither First Citizens Bank nor the First Citizens Wealth Management department provide tax or legal advice. You should always consult an attorney along with a tax professional to determine how to prepare the best estate plan for your situation.


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