5 Ways the SECURE Act is Changing Retirement Planning

On December 20, 2019, the SECURE Act took effect. Short for “Setting Every Community Up for Retirement Enhancement Act,” this law has dramatically altered the way financial planners and estate lawyers advise their clients regarding individual retirement accounts (IRAs) and other investments. These changes to the law are likely to alter the advice attorneys give, making a complete understanding of these changes vital.

The goal of the Act is to make saving for retirement easier and more accessible. By simplifying the law and adding additional flexibility, there are many ways for individuals to benefit from the changes. As with any change to the law, attorneys need to keep up with these changes to best aid their clients and avoid ethical dilemmas when giving legal advice. The following five changes to the law are the most likely to impact investors directly.

Changing Age Restrictions on IRAs

One important change involves the age at which people are required to begin making withdrawals. Before the adoption of the SECURE Act, anyone with money in a traditional IRA or employer-sponsored plan was required to begin withdrawing money at age 70 ½. This was an important milestone, as withdrawals from an IRA not only deplete the account but also have tax implications.

Under the SECURE Act, withdrawals do not become mandatory until age 72. This is valuable for many people, as it gives additional time for IRAs and 401(k)s to grow before disbursements begin. However, it can change the strategy for investment and estate planning, which makes revisiting those plans vital.

This single change alone can radically alter the estate planning process for an individual. As attorney Thomas J. Murphy discussed in IRAs and Retirement Assets in Estate Planning, the Secure Act can alter best practices on everything from disbursements to taxes. Attorneys must take care to determine if their prior advice regarding IRAs remains in the best interest of their clients following the change in the law.

Extended Window for Roth IRA Conversions

The change to the mandatory disbursal age also extends the opportunity for Roth IRA conversions. Unlike traditional IRAs, a Roth IRA allows for tax-free withdrawals for individuals that meet specific criteria. In most cases, the purpose of this conversion is to ease the tax burden on these investments now if people believe they will be taxed at a higher level later. The additional time to make these conversions provides an opportunity to make positive changes in an estate plan before tax consequences kick in.

Side Effects for Qualified Charitable Distributions

There are also potential side effects of charitable distributions from an IRA based on the change in the law. Under the old law, anyone over the age of 70 ½ could make qualified charitable contributions (QCCs) directly from an IRA in amounts up to $100,000. While the change in the age for mandatory withdrawals is a positive in many cases, it can have unintended consequences for anyone maxing out their qualified charitable distributions (QCDs).

Under the new law, the $100,000 limit on annual QCDs is now reduced by the aggregate amount of allowable deductions for the tax years prior to the SECURE Act. This means that individuals who make deductible contributions to their IRA after age 70 ½ could see a reduction in their QCD allowance.

Guaranteed Lifetime Income

Another important change to the current law allows employers to provide workers the option of using annuities to convert their savings into guaranteed lifetime income. However, there are legal protections that prohibit workers from suing their employer if their chosen insurance carrier refuses to pay out on annuity claims in the future. While this is an important change, it may be years before annuity options are available for most employees.

New Beneficiary Rules (The End of the “Stretch”)

Finally, the SECURE Act has made some important changes to the rules regarding beneficiaries. This includes the removal of the so-called “stretch” provisions for IRA beneficiaries. Under the old law, individuals inheriting an IRA had the option to stretch out mandatory disbursements throughout their lifetime. The SECURE Act prohibits this practice, requiring disbursement of the full inheritance within 10 years from the date of the owner’s passing. This change has far-reaching implications for practitioners and anyone who has an IRA trust. Existing IRA trusts relying on the stretch must be reviewed and re-evaluated. For those beneficiaries over the 10-year mark, required minimum distributions (RMDs) start in 2020. Forbes has called 2020 “the year of missed RMDs.”

For a deeper dive into how to adapt your IRA planning tactics to the new rules, don’t miss NBI’s upcoming course, IRA Planning after SECURE Act on July 15.

These are only a few considerations involving the SECURE Act. With so many recent changes to the law, it is always helpful to stay one step ahead of new legislation. The NBI course catalog has thousands of hours of courses on many of these topics.

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This blog post is for general informative purposes only and should not be construed as legal advice or a solicitation to provide legal services. You should consult with an attorney before you rely on this information. While we attempted to ensure accuracy, completeness and timeliness, we assume no responsibility for this post’s accuracy, completeness or timeliness.