The big news in year-end legislation is the long-anticipated SECURE Act was passed and will take effect on January 1st of 2020. The Act includes sweeping changes in several areas, including to Required Minimum Distributions, or RMDs, which affects many of you.
Let’s looking at a few financial planning changes from the SECURE act and see how they might work into your wealth strategy.
Age Change for RMDs
I don’t want to take the time in this article to go into the details and nuances of how to calculate your RMD. Suffice to say, if you are over 70, you are probably familiar with this requirement. One big headline from the SECURE Act is the age for the rule got moved from 70 ½ to age 72.
One nice thing about this change is that it eliminates the “half” part of the age requirement, which always baffled me. It’s like the 59 ½ age for taking penalty-free withdrawals from qualified plans.
Why the half? Whoever came up with that? It made it more confusing to have to figure out – is the birthday in the first or second half of the year? Anyway, it should be at least a little easier going forward!
So, while changing the age from 70 ½ to 72 seems pretty straight-forward, there is a bit of a transition period. Specifically, if you don’t turn 70 ½ until 2020, you’re under the new law. If, however you turned 70 ½ by the end of 2019, even though you won’t be 72 in 2020, you still need to take your RMD under the old rules.
Elimination of “Stretch” IRAs
Another notable change brought about by the SECURE Act is the elimination of “Stretch” retirement accounts. Under the old rules, a non-spouse beneficiary of an IRA account could stretch the distributions from the IRA over their lifetime, potentially greatly reducing the tax burden on the inherited funds. Under the SECURE Act, the lifetime stretch is replaced for most beneficiaries with a maximum “stretch” of 10 years.
One detail of this new change is that there are no annual distribution requirements over the 10 years, as long as the account is fully distributed by the end of the 10th year after death. Because there are no required annual distributions, as there were under the old rule, many trusts may need to be reviewed.
Get Your Trusts Reviewed
In general, trusts that are named as the beneficiary of retirement funds are usually drafted so that the ultimate beneficiaries of the trust can limit the income distributions from the trust to the required amount under the old “stretch” rules.
Since the SECURE Act’s 10 year rule doesn’t require annual distributions, it may require that no distributions are allowed until the 10th year, when the total amount would have to come out and be taxed to the beneficiaries in one year.
IRA Contributions Allowed After 70 ½
If you are closing in on age 70 ½ and are still working, you may be happy to learn that another change in the law allows you to continue to contribute to your IRA after 70 ½, assuming you still have compensation. Of course, even though you’re still working, you’ll have to take your RMD’s according to the schedule!
Qualified Charitable Distributions
Last, for those taking advantage of Qualified Charitable Distributions, you’ll be able to continue to use this strategy at 70 ½, even though in the past QCDs were tied to RMDs and their age requirement.
If you’re not familiar, QCDs can be a great strategy for those who must take a distribution from a retirement account, but don’t want to use the money, and would rather donate it to a charity.
With the QCD, the money goes directly from the retirement account to the charity, and not through the owner’s tax return. This is key for those not itemizing their deductions anymore, as many aren’t. So even though the RMD age has changed, the age for QCDs hasn’t, so you can continue to donate without the attendant RMD.
These are a few of the financial planning changes from the SECURE Act that may affect you personally. As always, if you have questions about these changes please don’t hesitate to call.
Your financial advisor team at Meikle Financial Group has prepared well for these changes, and we’re ready to help you plan ahead. Let’s have a great year!