SECURE Act Tax Law

Excerpt from David Hulstrom, CFP®, CFA®, author:  

Congress gave us a year-end bill (here) that has financial planning implications. There are a lot of provisions that could affect the financial planning of our clients.

Below are the five things that many people need to know. There are lots of exceptions and provisions to many of these rules but I want to keep this readable, so I will (mostly) leave the detail out – when you see a word such as "generally" or "basically" below, that's why.

Most items of interest are in the SECURE Act portion (Setting Every Community Up for Retirement Enhancement Act of 2019) of the spending bill; but there are a few random things from elsewhere I'll include as well.

First, Modifications to Required Minimum Distribution Rules. There is a detrimental change for many families. If you are planning to leave a retirement plan to your descendants, they will generally no longer be able to take the proceeds over their life expectancies; rather, the maximum deferral period will be ten years. Relevant details:

1. This does not apply to leaving the retirement plan to your spouse.
2. This does not apply to those who have already inherited a retirement plan.
3. If your estate planning documents leave your retirement account to a trust for the benefit of your heirs, we should re-evaluate that decision.
4. If your taxable (i.e. non-Roth, non-basis) retirement plan balances are likely to be high enough that withdrawing one-tenth each year for the ten-year deferral period would be enough to place your heirs into a higher income tax bracket than you are currently in, then Roth conversions for their benefit may be prudent.

We are exploring possible alternatives, such as Charitable Remainder Trusts, that would preserve the "stretch" and could also incorporate ways to retrieve the creditor protection lost in the 2014 Clark v. Rameker case. The current low-interest-rate environment seems to eliminate the CRT strategy for now and it isn't certain a solution is possible, but efforts continue...

Second, Increase in Age for Mandatory Distributions. There is a small, yet favorable, change. For those who are not yet 72, RMDs (Required Minimum Distributions) from retirement plans will now begin at age 72 rather than age 70½. QCDs (Qualified Charitable Distributions) continue to have a 70½ start age.

Third, Repeal of Maximum Age for Traditional IRA Contributions. There is another small, yet favorable, change. For those over age 70½ who have earned income you can now contribute to an IRA.

Fourth, in the spending bill itself, but not the SECURE Act section we have been discussing, the change in the "kiddie tax" (basically tax on unearned income for a child under 18, or under 24 and a full-time student) that was made by the 2018 Tax Cuts and Jobs Act (TCJA) is repealed. Those earnings will again be taxed at the parent's marginal rate as they were previously rather than at trust tax rates.

Fifth, unrelated to this bill, but a recent development worth including here, beginning in 2021 the IRS is changing its life expectancy table for the calculation of RMDs. To use just two examples, previously an 80-year-old using the standard table would have used a life expectancy of 18.7 years but in 2021 it will be 20.2. A 90-year-old will change from 11.4 to 12.2. This means the required distribution will decrease from 5.35% to 4.95% at 80 and 8.77% to 8.20% at 90. Not a huge change, but a good one.

Sixth, Parents who have 529 account balances, and children with outstanding student loans, are now able to use 529 balances to pay off student debt.

Happy New Year!