SECURE Act Brings Sweeping Changes to Retirement Planning

The closing days of 2019 brought sweeping changes to retirement planning with passage of the SECURE Act (Setting Every Community Up for Retirement Enhancement). Key provisions of this act include:

Changing the Required Beginning Date for distributions from most qualified retirement accounts to April 1 of the year after the participant reaches age 72 (up from 70.5). This provision takes effect for people turning 70.5 on January 1, 2020 or later. Qualified Charitable Distributions are still allowed starting at age 70.5.
Allowing contributions to IRAs after age 70.5 if there is sufficient earned income.
Repeal of the Kiddie Tax changes implemented as part of the Tax Cut and Jobs Act of 2019. Specifically, the Kiddie Tax rate reverts to the parents’ marginal tax rate, rather than using trust tax rates. The new law also allows use of either method for 2019 returns, and for 2018 as well, which may lead to amended 2018 returns for people affected by the change.
Expansion of the list of qualified expenses that may be covered with Section 529 college savings plan funds.
Various incentive changes to encourage both employers and employees to increase contributions to retirement plans.
Numerous other small changes, tweaks, and extensions and modifications of existing tax breaks.
Elimination of the “Stretch IRA” for non-spouse retirement plan beneficiaries. This is the most significant development in the new legislation and is discussed further below.

Prior to passage of the SECURE Act, non-spouse beneficiaries of qualified retirement plans (including defined contribution plans such as 401(k)s, and IRAs) could stretch their distributions from the plans over their life expectancies as of the time they inherited the account. For most people, this meant many years of tax-deferred growth until the account would be fully depleted once they reached their early to mid-80s.

Under the new law, most non-spouse inherited retirement accounts must be fully depleted (and taxed as applicable) by the end of the tenth year following the year of inheritance. The law applies to people inheriting most types of retirement accounts starting in 2020. The rules for people who already have inherited retirement accounts are unchanged; that is, distributions can still be stretched as before.

There are no specific requirements within the ten-year distribution window, which provides some limited planning opportunities, but regardless, the accounts must generally be distributed and taxed much more rapidly than before. Inherited Roth IRAs face the same acceleration of distributions, but the distributions themselves are still not taxable provided the requisite five year holding periods have been met. Of course once the money is distributed it will be taxed on an ongoing basis in whatever type of taxable investment or savings account the funds are deposited into.

People who have named trusts as beneficiaries of retirement accounts will want to have the designations and associated trust language reviewed by their estate planning attorneys. In some cases, the language may not allow any distributions until the tenth year, at which time all the money would to be distributed and taxed. This could be an extremely unfavorable result.

These changes will make ongoing asset location decisions much more complicated throughout life. Asset location refers to the type of account (taxable, tax-deferred, tax-free, Roth, etc. that holds the money). Leaving too much money in a tax-deferred retirement account at death may saddle the younger generation with a significant increase in taxable income during peak earning years. It may make sense to put more money in regular taxable investment accounts so as not to over-fund tax-deferred plans. Roth IRA conversion strategies will change and potentially lead to increased amounts converted to Roth IRAs. The appropriate strategies for individual cases will vary widely, and will be subject to major uncertainties about future incomes of multiple generations. It will take some time and research for the best strategies to evolve.