The Passing Of The Secure Act
Updated: Jan 14
Today, we're going to talk about the passing of the Secure Act, some good things, some not so good things. Most importantly, the death of the Stretch IRA .
The passing of the secure act, this was stuck in Congress for a while, it was passed and the president signed it in late December of 2019. These are some of the most significant changes we've seen since the Pension Protection Act of 2006. This legislation is designed to expand access to retirement accounts, promote participation, all good things, preserve savings, with some changes that will restrict your heirs from benefiting from the continued tax deferral of inherited IRA accounts. That is the stretch IRA!
I'm going to point out some highlights. You've got the employer and plan sponsor side plan participants, individuals and IRA owners. Let's talk about the employer side first. Increased tax benefit for benefits that are establishing a retirement plan. This is for plans with less than one hundred employees, where before you got a five hundred dollar annual tax credit. Now it can go up to five thousand maximum and over three years. So that's a good thing. Number two, expand access to lifetime income option. So what does this mean? Well, a lot of small retirement plans are annuity based and they offer some lifetime income options. So now they're going to allow some portability, meaning you can transfer this into a like account and still get some of those lifetime income options, plus a minus as their fees are a part of it, but it can be important for some retirees. Here's the big one, part time workers can now participate in retirement plans. So the old rules say you need a thousand hours of work. Now just five hundred hours in order to participate. That is definitely a plus!
Now let's talk about the individual side. This is where a lot of our clients are going to be affected, and a lot of our viewers as well. Here is some positive news, increased age for required minimum distribution, RMD. So the old rules at age 70 1/2. You must start taking money out of your IRA. The big man wants his taxes, So now this is increasing to the age of 72. This is only available for those individuals who have not yet started their RMD. (Require minimum distributions) So if you're due in 2020, you've got some decisions to make. This is a good thing, it allows your investments to continue to grow. Another change is repealing the age limit for traditional IRA contributions. Again, before 70 1/2 was the max age, and generally, the Roth was your only option, now you can continue to contribute as long as you have some earned income. Here's a good one for families, penalty free distributions for birth or adoption. Keep in mind, if you take money out prior to 59 1/2, you're going to pay taxes and you have a 10% penalty. Now you can take up to five thousand per occurrence and only have to pay taxes, not that additional penalty.
Last year we did a lot of charitable distributions from IRA's. Why? Well, the new tax law, not a lot of people were itemizing because you're getting twelve thousand automatic deductions, twenty four thousand as a couple. So without itemizing, some people didn't see the value in those charitable contributions. You are allowed once you were in RMD (70 1/2 today) to make those charitable contributions direct from your IRA to a named charity. Pretty good thing that you can do to reduce your taxable income. So the good news is, even though we went to 72 with RMD, they are keeping it at 70 1/2, for those charitable distributions.
Now moving on to the bad changes. I am so disappointed by this, I can go back to 1999 when I was in the distribution side and talking about this and nobody believed me. The concept of a stretch IRA, a decedent IRA. So when you pass away, of course it goes to your spouse tax free. But you could have a non spousal beneficiary, like your children,
And that could continue based on their age. So you would continue to get that benefit of tax deferral. The distribution will be on their age, so that amount would be less, and it's been taken away‼️ Not good! So what's happening here? Well, what they're doing is they're giving you 10 years, so you've got lump sum or 10 years to distribute this IRA.
Now, it does not affect your spouse again, but non spousal, Any death occurring after December 31st, 2019 must now adhere to this new rule. Let's talk about the effect of that. Planning, right before, this was a big planning opportunity. You could stretch it, continue it, not have a big tax hit to the kids, whatever the case might be on the non
spousal. So now you've got 10 years, So you need to think about it, calculate it. Maybe we go back to this life insurance concept to help reduce the taxes. There's a lot of different things. More to come on that. Now, there are a few exceptions. One is if the beneficiary is disabled or has a chronic disease. The beneficiary is not more than 10 years younger than the deceased, account owner beneficiary is a child of the deceased owner who's not yet reached age of majority.
This is the reason for having a financial plan done, as always we are here to help get you on the road to success. Thanks for reading !