SECURE Act: Impact on Taxes and Retirement – Lewes Public Library

February 5, 2020

Blue Rock Financial Group hosted the February Todd Talk on February 5th at the Lewes Public Library in Lewes, DE. February’s topic was “SECURE Act: Impact on Taxes and Retirement.” We were joined by Special Guest, Alison Houck, CPA & Managing Partner at Faw Casson. Here are some of the key takeaways from the event.

For Retirees

Required Minimum Distribution (RMD) Age Increase

Age required to take RMD’s has been increased from 70.5 to age 72.
For individuals attaining age 70.5 after 12/31/19 previously had to take RMD by April 1 of the year following the year age, 70.5 was met. Additionally, certain individuals working past age 72 may be able to defer RMDs even further – as long as you are less than a 5% owner of a company, you are not required to take RMDs from your 401k plan – You are, however, required to take the distribution from the IRA.

Repeal of The Maximum Age For Traditional IRA Contributions

Repeals the prohibition of deductible contributions to a traditional IRA by an individual who has attained 70.5. Starting in 2020, new rules allow and individual of any age to make contributions to an IRA, if the individual has compensation, which is generally earned income from wages or self-employment.

It also reduces the qualified charitable distribution exclusion by the excess of the allowed IRA deduction for all taxable years ending on or after age 70.5 over the amount of all prior year reductions.

Stretch IRA is DEAD

Prior to 2020, beneficiaries (spousal and nonspousal) were allowed to stretch the IRA by taking distributions over the beneficiary’s life or life expectancy. Now, for non-spouse beneficiaries, the entire account must be distributed within 10 years after the date of death of the IRA owner, regardless of whether the deceased distributions had begun.

1. Although, given an eligible designated beneficiary the stretch still does work under these circumstances: (NOTE: this does not include surviving spouses)
– A child who has not yet reached majority
– Chronically ill individual
– Disabled beneficiary
– Anyone else who is not > 10 years younger than the plan participant/IRA owner, they can still elect to delay until the end of the year that the IRA owner would have attained age 70.5 or 72 under this act – All those who passed away on 1/1/2020 or later. Here are a few examples:

Example 1: Harold dies in 2020 and leaves his IRA to designated beneficiary Hermione, his sister, who was born eight years after Harold. Hermione is an eligible designated beneficiary. Therefore, the balance in the inherited IRA can be paid out over her life expectancy. If Hermione dies before the account is exhausted, the remaining balance must be paid out within 10 years after her death.

Example 2: Ingrid dies in 2020 and leaves her IRA to designated beneficiary Ignacio, her brother, who was born 12 years after Ingrid. Ignacio is not an eligible designated beneficiary because he is more than 10 years younger than Ingrid. The balance in the inherited IRA must be paid out within 10 years after Ingrid’s death.

2. Trust Implications
– This 10-year rule may have implications for those who had estate planning documents which an individual named a conduit trust as the beneficiary – if this is the case, it is likely that the conduit trust was named as a beneficiary to ensure the stretch provisions are used, as well as for the asset and creditor protection aspects, ultimately for the benefit of the eventual beneficiaries. With the new rule, it will actually force much larger than intended distributions by way of trust. This will likely need to be re-examined with the rest of the individual’s estate plan.

For Individuals

Benefits for Graduate Students

Non-tuition fellowship, stipend or similar amounts can be included in income for purposes of calculation IRA contributions to allow graduate and postdoctoral students use of an IRA to save for retirement.

Penalty-free retirement plan withdrawals

An exception to a 10% early withdrawal penalty for the birth of a child or adoption up to $5,000 per individual (so if husband and wife, can each take $5k for $10k distribution excluded). If made within 1 year of birth or adoption.
Benefits for volunteer firefighters and emergency medical responders. Reinstated exclusion from gross income for qualified state and local tax benefits and qualified payments for services performed for one year and increases the qualified payment exclusion from $30 to $50 per month for volunteer firefighter and emergency medical responders services.

Additional Eligible Expenses for 529 Plans

Plans can now be used for fees, books, supplies, and equipment for registered apprenticeship programs (retroactive to 12/31/18). In addition, 529 plans can be used for up to $10,000 of student loan repayments (includes principal and/or interest) for beneficiary or sibling of a beneficiary. Keep in mind that some states may not adopt this. We will need to review the state plan.

Kiddie Tax

TCJA changed rules for children with unearned income – previous to 12/31/17, their investment income was taxed at the same rate as the parent’s tax rate if the parent rates were higher than the child’s. Beginning tax years ending after 12/31/17, the tax was now taxed at the brackets applicable to trusts and estates. New rules repeal the kiddie tax measures so starting in 2020 with the option to start retroactive to 2018 and/or 2019, the unearned income is taxed under the pre-TCJA rules and not the trust/estate rates.

Failure to File Penalty

When an income tax return is more than 60 days late, the penalty cannot be less than $435 or the tax required on the return (whichever is lesser) unless the failure is due to reasonable cause and not willful neglect.

Have questions regarding how the SECURE act impacts you? Ask us a question HERE.