New SECURE Act Regulation
Hello Friends and Clients of ZWM,
As you may know, Congress passed the SECURE Act in late 2019, which went into effect on January 1, 2020. It brings significant changes to the retirement and financial planning landscape. We want to make you aware of some of the changes, and assure you that we are up-to-date on these developments. As always, we are on the lookout for opportunities to help you achieve your financial goals.
The major provisions of the SECURE Act are below:
Elimination of the Stretch Individual Retirement Account (IRA)
Arguably this is the biggest change from the SECURE Act. Previously, IRA beneficiaries could stretch distributions from an inherited IRA over their lifetimes. The SECURE Act stipulates that in almost all cases, retirement assets inherited by a non-spouse (e.g. adult children) must be distributed from an IRA within 10 years of the owner’s death. This change takes effect for those who pass away in 2020 and beyond; previously inherited stretch IRAs are not affected. The change will likely have significant tax consequences for the non-spouse inheritors of large IRAs. While it will take some time for all of the potential consequences of this change to play out, we believe it will likely result in a few planning opportunities.
- First, in many cases, converting IRAs to Roth IRAs may be more attractive. While non-spouse inheritors will still need to withdraw IRA assets within 10 years, withdrawals from Roth accounts are not taxed and therefore will not push an heir into an unfavorable tax situation.
- Second, charitable trusts and life insurance may become better tools to regain stretch-like options or pass on assets to heirs with fewer tax consequences.
- Lastly, many estate plans will need to be reviewed to ensure there are no unintended consequences of documents written under the old laws; especially estate plans that leave IRA assets to a trust.
We will be following up specifically with clients who we believe will be affected from the changes to the law, and we will be discussing these changes in future financial planning meetings. We recommend you contact your estate planning attorney to discuss if your current documents need revision in light of the SECURE act.
Required Minimum Distribution (RMD) Age Extended to 72
The previous requirement that distributions from most retirement accounts begin at 70½ years of age is pushed back to age 72 for those who have not yet turned 70½. For people who have not taken RMDs, and do not need distributions for living expenses, this allows for a few additional years of tax-deferred investment growth. We will discuss this change on a client-by-client basis in future financial planning meetings.
Age Limit Removed for IRA Contributions
Before the new law passed, contributions to a traditional IRA were not permitted after age 70½. The SECURE Act removed that age limit, and contributions can continue past 70½ for anyone who has earned (not investment) income to contribute.
Student Loan Repayment through 529 Plans
Previously, 529 college savings plans could not be used to pay off student loans. With the SECURE Act, individuals can now withdraw up to $10,000 to pay student loans. This is capped to a $10,000 lifetime limit per beneficiary. We will be evaluating this strategy for each client who has a 529 plan for either children or grandchildren who are approaching or already completed their schooling.
While there are other provisions to the SECURE Act, we believe these are the most immediate and impactful to many of our clients. As mentioned, we will be proactively contacting many of you and will certainly address these changes in 2020 financial planning meetings. Additionally, we encourage you to take a few moments to review your estate planning documents with your attorney. As always, if you have questions, or if we can serve you in any way, please don’t hesitate to reach out.
Thank you for your trust, and have a very happy and productive beginning to the New Year!
The ZWM Team