The SECURE Act of 2019 brought about significant changes for financial planning in retirement. SECURE, standing for Setting Every Community Up for Retirement Enhancement, resulted in several revisions to retirement legislation.
The elimination of the stretch provision for inherited qualified accounts (including Roth IRAs, Traditional and Rollover IRAs) was one of the most significant changes resulting from the SECURE Act. Prior to being passed by the House in summer 2019, a non-spouse could stretch distributions over their lifetime if they inherited a qualified account. By doing so, beneficiaries could reduce the weight of taxes by withdrawing smaller amounts. Following the launch of the SECURE Act, beneficiaries must withdraw the overall balance within 10 years of the owner’s passing. This change only applies to accounts inherited after 2020. IRAs inherited prior to the Act are grandfathered under previous legislation and can continue to be stretched over a lifetime. For example, in 2019 and years prior, before the SECURE Act, if Tom inherited a $1,000,000 IRA he could stretch the required distributions from the IRA over his lifetime by consulting the IRS Uniform Lifetime Table. In 2020, if Tom inherited a $1,000,000 IRA, after the SECURE Act was passed, he is required to take out the total balance within 10 years. If Tom withdrew $100,000 annually over the next decade it would be added to his taxable income for that year.
The calculations are standard for sole beneficiaries. For those with a trust as a beneficiary of your qualified retirement accounts, your advisor or estate attorney should review to ensure any ‘see through’ provision is properly sited. The trust could potentially allow only one distribution of the inherited IRA in year 10, the last year of the requirement to distribute, if unchanged. Realizing their entire inheritance from the IRA in one year would create a significant tax burden for the beneficiary.
In addition to the elimination of the Stretch IRA, required minimum distributions (RMD) do not begin until 72 years of age, affecting those turning 70.5, the previous RMD age, in 2020. A lifetime limit of $10,000 of 529 plan can now be used to pay off student loans. Changes to contributions to traditional IRAs are now permitted for those who have earned income through employment or self-employment and are older than 70.5. This allows backdoor-ROTH IRA contributions to continue for those still working. The practice of gifting money directly from your IRA to a 501(c)(3) charitable organization to avoid federal taxation of the gifted amount can still be utilized starting at 70.5 years of age.
Any significant changes to financial legislation can alter your financial plan. It is best to consult with a knowledgeable financial advisor such as Fragasso Financial Advisors in Pittsburgh, PA to determine exactly how these changes impact you and if adjustments to your financial plan are warranted.