Financial Geekery

The SECURE Act: Don't Blow It Off!

January 7, 2020

Because it occurred in the middle of the holiday bustle, you may have missed Congress passing the SECURE Act Of 2019. And while "Setting Every Community Up for Retirement Enhancement" may seem a bit grandiose for what the law actually does, don't assume it doesn't apply to you. There are a few seemingly-secondary aspects to the new law that could warrant amending your 2018 tax return -- and putting some money back in your pocket!  

 

While your CPA should know best how the SECURE Act affects you in particular, here are some highlights you should know about, particularly if you're a tech professional working for a mid- to large-sized business.

 

No More "Stretch" IRA's

 

The biggest change to tax law is likely the elimination of "stretch" IRA's. As some of you may already know firsthand, if you inherited an IRA before 2020, you could generally "stretch" the required minimum distributions from it over your lifetime, giving you the flexibility to optimize said distributions around your tax situation. For example, if you inherited an IRA at 40 and were in your peak earning years, you didn't have to take the whole thing (and the associated tax bill) immediately; rather, you could spread the distributions out over your whole lifetime, and maybe take more of them in retirement, when you'd be (presumably) in a much lower tax bracket. A nice deal, right?

 

Well, that's mostly gone now. Generally speaking, if you inherit an IRA from a non-spouse in 2020 or later, you have 10 years to empty it out. You can take said distributions whenever you want, though, so for example, if you're going to retire in 5 years, you can take nothing until then so as to potentially minimize taxes.

 

Now, the following people can still follow the old "RMD-over-your-lifetime" rules: spouse beneficiaries (per above), disabled beneficiaries, chronically ill beneficiaries, beneficiaries not more than 10 years younger than the deceased, and minor children of the deceased.

 

Let's talk about that last group a bit more, though. For one thing, once a minor child hits the age of majority, the 10-year rule kicks in -- they can take lifespan-based RMD's until that point, but after that, they have 10 years to empty out the inherited IRA! For another, if you've got a testamentary trust set up in your will, now might be a good time to have your lawyer review the language and make sure it plays nicely with an inherited IRA. If it's designed to only pass on RMD's to your children -- a fair design choice, given prior law -- what it will actually do now is distribute lifespan-based RMD's until they reach age of majority, then nothing for 9 years (because there are no longer RMD's at that point), and then the entire balance of the inherited IRA at year 10!

 

Finally, I want to point out that while I say stretch "IRA's", these rules apply to other retirement plans, and many of those -- specifically plans created by collective bargaining agreements, 403(b)'s, 457's, and the federal TSP plan -- don't get hit by the 10-year rule until 2022. 

 

RMD's are getting pushed out

 

Now, I've spent a lot of time talking about RMD's for inherited IRA's, but there's also a change for RMD's for your IRA. Specifically, while formerly you had to start taking distributions at 70.5, now that age has been raised for 72. I'm a particular fan of this, because that gives us 2 more years at a potential lower tax rate that we can use to e.g. make Roth conversions. More flexibility is more better! 

 

Oddly, you can still make qualified charitable contributions directly from your IRA starting age 70.5 -- which makes this a double-win!

 

Retirement plan withdrawals for childbirth/adoption

 

You know how you can avoid being penalized for early retirement withdrawals if it's for e.g. certain education or homebuying expenses? Well, the SECURE act adds another one to the mix: expenses concurrent to childbirth and adoption. Note: I say expenses concurrent to one of these -- not related to, or caused by, or anything like that. The law only cares about the timing, effectively saying that you can withdraw up to $5,000 penalty-free from your retirement plan for the one-year period after childbirth or adoption finalization. (So yes, this could be used to defray the cost of fertility treatments -- but remember, you have to wait until after you've brought the child to term to take the distribution!)

 

Also, note that unlike other related straight-up distributions, you can -- if you want -- "repay" the money you borrowed, effectively getting a one-time increase to your contribution limit by the amount that was distributed during the qualifying event window. The technical details and timing of this are unclear as of yet, though, so you may want to wait for its clarification in future Treasury rulings.

 

Annuities may start appearing in more 401(k)'s

 

The SECURE Act offers what's called a "Fiduciary Safe Harbor" for employers offering annuities in their retirement plans, as well as allowing for distributions on said annuity in the wake of separation of retirement/death etc. The technical details of this are likely uninteresting to you, but the upshot is it's now safer and more appealing for employers to start offering annuities in their retirement plans, so you may start seeing more of them pop up. 

 

529's can be used to pay for apprenticeships -- and student loans

 

SECURE expands qualified 529's distributions further: now, in addition to covering qualified education expenses for both college and private school, 529's can also pay for qualified apprenticeships and even qualified student loans. There's a lifetime cap of $10,000 on loan repayments from 529's, but still, that's not nothing!

 

Why you may want to amend prior tax returns 

 

Some of the recent changes actually affect prior years' tax returns, such that you may want to amend them!

 

For example, the Kiddie Tax rule reverted to the way it used to be before the 2017 tax law change. In The Old-And-Now-New-Again Way, children subject to Kiddie Tax were taxed at their parents' marginal rate (rather than their own, likely much lower rate). The 2017 law changed things so that Kiddie Tax was levied at the tax rate of trusts, which is pretty brutal -- it hits 37% at a meager $12,750 of income! (Another reason, by the way, that you want to be really careful about using trusts to handle inherited IRA's!) SECURE not only brings it back to the parental rate, but also retroactively applies that to 2018 and 2019!

 

There are also several other tax breaks that expired as of 2018, but have been retroactively reinstituted in the same appropriations package as the SECURE Act. Specifically, these are: the deduction for qualified tuition/education expenses (!), the mortgage insurance premium deduction, and the tax break for forgiven debt related to certain home-related expenses. Again, if these apply to you, your 2018 tax return is worth revisiting!

 

That's not all!

 

Those were the highlights, but there's a bunch of other stuff in the law change: an extension of the 7.5% floor for medical expenses, elimination of the age limit for contributing to IRA's, incentives for small businesses to offer retirement plans, etc. etc. Again, talk to your financial planner and/or CPA -- I myself didn't realize I was personally affected (in several ways) until I did my due diligence research on the new law! 

 

 

Britton is an engineer-turned-financial-planner in Austin, Texas. As such, he shies away from suits and commissions, and instead tends towards blue jeans, data-driven analysis, and a fee-only approach to financial planning.

 

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