Back in June, I wrote about the SECURE Act, which passed the House in May in overwhelming fashion. Since then the bill spent months gathering dust in the Senate and there were concerns it might never pass. Finally, the SECURE Act, along with a tax extenders package, was added to a government spending bill and was signed into law on December 20, 2019.
While the basic framework of the bill still looks similar to what I discussed back in June, there were some discrepancies between the House and Senate versions that have now been resolved. Here are the aspects of the bill that will have the greatest impact for many of our clients:
No More Stretch IRA’s - Under current law, if you inherit an IRA from someone other than your spouse, you can leave that money in an inherited IRA and you are only required to take out a minimum amount each year based on your life expectancy. This is sometimes called a “stretch” provision because it allows you to stretch out the distributions over a long time period. Unless the money is needed right away, the stretch provision allows you to defer paying the tax on that inheritance for a longer time period.
The SECURE Act will change these rules so that non spouse beneficiaries, (along with minor children and some other beneficiaries) who inherit an IRA after January 1, 2020, will no longer have to take annual distributions. However, they will have to distribute the entire IRA within 10 years. This eliminates the “stretch” provision, but it does still leave open some planning opportunities. It will become crucial to look at multi-year tax projections to try to minimize the tax impact of the liquidation of these IRA’s.
IMPORTANT NOTE: This change will not apply to existing inherited IRA's, which will continue to follow the old "stretch" rules. If you inherit an IRA before January 1, 2020, you will still be able to take distributions out according to your life expectancy.
Required Minimum Distributions Delayed to Age 72 - Under current law, you are required to start taking distributions from your IRA or retirement account by April 1st of the year after you turn 70.5. The SECURE Act will delay those required distributions until April 1st of the the year after you turn 72.
While this may seem like a minor change, it does provide some extra time for your IRA to continue to grow tax deferred. For those who retire before their 70’s, it also extends the critical time period between retirement and RMD age, where many individuals fall into a very low tax bracket. We are frequently helping clients in this time period implement tax planning strategies that can greatly reduce their overall tax liability.
IRA Contributions Allowed Past Age 70.5 - Under current law, you cannot make IRA contributions after you reach age 70.5. Under the SECURE Act, there would be no age limit for making IRA contributions. With people living longer and many individuals working in some capacity at a later age, it could be a great benefit to some to be able to contribute to an IRA after they reach age 70.5.
Kiddie Tax Goes Back to Old Rules - This summer, I wrote about changes to the kiddie tax enacted by the Tax Cuts and Jobs Act. As I mentioned in that article, the SECURE Act repeals those changes, with unearned income of children above certain thresholds again being taxed at their parents' rates rather than at trust rates. The change will take effect for 2020, but for 2019 and 2018 you will have the option to use either method to calculate the tax. This means for 2019 we'll have to look at two different calculations, and some individuals might benefit from going back and amending their 2018 returns using the alternative calculation.
There is much more included in the bill, and this comprehensive overview provides more information if you are interested on going deeper. If you have any questions specific to your situation, feel free to reach out to me directly.
-Chris Benson, CPA, PFS
The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.
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