How the Secure Act Affects Your Retirement

January 28, 2020

The SECURE Act (which stands for Setting Every Community Up for Retirement Enhancement Act) was signed into law on December 20, 2019, by President Donald Trump, as part of the federal spending bill. The law took effect January 1, 2020. This is the most sweeping federal legislation to affect retirement planning in more than a generation! The SECURE Act includes important tax changes, mainly affecting retirement savings. SO… what are these BIG changes and how do they affect YOU?

The most significant changes under the new law relate to how distributions from a retirement plan must be paid out following the death of the account owner (and the death of the surviving spouse). For example, if you receive a distribution from a qualified retirement plan, a Section 403(b) tax-sheltered annuity plan, an eligible Section 457(b) deferred compensation plan, or an IRA, you must report the taxable portion as income on your return. Fair enough. But now…the highly favored “stretch” distribution rules previously in place have been largely eliminated, with certain minor exceptions. In a nutshell, this means that distributions happen faster, have a higher monetary value, and depending on your income tax bracket, may be taxed at a higher rate. Read on to learn the nitty gritty of the law.

The New Law Utilizes the Old Law, with some SIGNIFICANT Changes:

  • Preference to a 10 Year Payout: There are new distribution rules following the death of the account owner dying on or after January 1, 2020. The previous “stretch” distribution rules have been phased out in favor of a 10-year payout. The result is that many beneficiaries will now be forced to distribute the retirement account sooner with larger distribution amounts. Therefore, beneficiaries may have a higher tax consequence than was previously the case.
  • The New 10-Year Rule: Essentially, Uncle Sam Needs the money sooner rather than later. Accelerated distribution of these taxable retirement accounts after the death of owner and spouse should raise more revenue for the Treasury now to help remedy the federal budget deficit. The Congressional Research Service estimates that the SECURE Act changes will raise an additional $15.7 Billion over the next 10 years.
  • Taxpayers who are still working may continue to contribute to their IRAs past age 72 (previously contributions were prohibited beyond age 70.5). The $100,000 limit on qualified charitable distributions (QCDs) is reduced by the amount of deductible IRA contributions made after age 70.5.
  • Taxpayers’ required beginning date has been pushed back from 70.5 years of age to age 72. Each taxpayer must take their first required minimum distribution (“RMD”) by April 1st of the year after the year in which they reach age 72. Note that most individuals will continue to take the first RMD in the year they reach age 72 to avoid a double payment year (by waiting until April 1 of the year after and then having to take another payment by December 31 that same year).
  • Account owners who turned age 70.5 on or before December 31, 2019 need to start taking RMDs by April 1 of the year after the year they turned 70.5. Account owners turning 70.5 in 2020 or later don’t need to start taking RMDs until April 1 of the year after the year they turn 72.
  • An account owner who owns less than 5% of their company and who continues to work may defer RMDs until retirement.
  • Account owners owning Roth IRAs have no RMDs.

Who Exactly Does this Impact?

Individuals likely to feel the burn of the new law are:

  • Those with considerably larger retirement savings.
  • Those who designate a small number of beneficiaries on the accounts, thus making each beneficiary’s share relatively large.
  • Those whose beneficiaries are already in a top income tax bracket (meaning that any future retirement plan inheritance may push them into an even higher tax bracket).
  • Those who presently name their grandchildren to receive their IRA in order to obtain the longest stretch benefits. The new rules state that leaving the IRA to grandchildren (even if they are minors) will not provide this stretch benefit.
  • Those who continue to use trusts as part of their planning for retirement assets. Note that the rules affecting use of trusts are still in limbo and definitive estate planning solutions are currently in the works.

One consequence of the new law is that your prior retirement planning and estate planning may no longer be optimal. If you have a retirement plan of significant value, or if you have a retirement plan which is to be held in trust upon your death, it is highly likely that you will need to update how you plan for your retirement assets.

Contact OC Estate & Elder Law at (954) 251-0332 or for a free consultation to learn more about fine tuning your retirement planning and fine tuning the inheritance you wish to leave behind. Our attorneys are fluent in English, Spanish and Russian.