The SECURE Act has been generally welcomed by the retirement planning industry and its in-the-know clients.
Most of the law’s provisions should have a salutary impact and should help boost the retirement incomes of actively invested American seniors. As for any negative developments, we’ll have to adapt. Meanwhile, the law has been active for nearly a month and advisors are striving to respond to the new planning reality.
Rule changes on inherited retirement accounts stand in particular relief. Before the SECURE Act’s passage, heirs who inherited IRA, Roth IRA, 401(k) and other eligible accounts were allowed to take the required minimum distribution over the course of their entire lives. If you inherited your grandfather’s 401(k) at age 25, you could take the RMD and stretch grandad’s largesse over the remainder of your estimated lifespan. It was a sound way to enjoy a boost to your lifestyle without crossing any tax bracket boundaries.
That path is now blocked. Inheritors of retirement accounts must now withdraw the entire amount in the account by the 10th anniversary of the original holder’s death (this rule applies to the estates of benefactors who die after 2019). This change could mean elevated taxes for beneficiaries. This is why the provision was included: Uncle Sam needs money and he’s pretty skilled at getting it. It makes sense, we concede: the original holder who built the accounts and lived off them in retirement faces no punishment, while the undeserving (in the eyes of tax bureaucrats and legislators) gets a taste, but not for a lifetime. There’s no escaping their logic, even if you wish you could.
One detail worth noting here: there are no RMDs for the first nine years. The account must be empty by the end of the tenth year; that’s the only requirement. This introduces flexibility that can be advantageously used by the heir. Exceptions abound – spouses are exempt from the 10-year rule, as are certain classes of minors, among others – so check the fine print.
Next up, the threshold for taking the first RMD from qualified accounts has been raised from the inscrutable 70½ of earlier years to 72. This is no minor change, in our view: the earlier boundary often led to confusion and costly planning mistakes. Unfortunately, if you failed to reach 70½ before this year, you’ll still need to operate under the old regime’s rules.
Fortunately, one useful planning rule from the old law is still in place: the ability to make a charitable contribution of up to $100,000 from your IRA. The starting age limit is still 70½ – it seems we’ll never fully escape this troublesome age boundary.
Good news on the IRA front: in the pre-SECURE Act days, once the 70½ hurdle had been crossed, contributions to these accounts were blocked. Starting this year, IRA top-ups will be allowed for people who still have earned incomes. Many seniors are choosing to remain in the workforce these days and the boost from late-innings contributions could make a substantial contribution to their eventual retirement incomes. We rate this change as a line-drive home run.
Provisions of the new law should help make annuities a commoner component of company retirement plans and 401(k)s. In previous years, fiduciaries usually avoided annuities in these contexts, because of their elevated fees and liability issues. The SECURE Act helps protect these planners, assuming they closely follow the newly established rules. We expect retirement planners to focus a keen eye on annuities and see potential for their much wider usage in the future.
For more information, please read:
Four Ways The SECURE Act Impacts Your Retirement Planning Now | Forbes