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"Setting Every Community Up for Retirement Enhancement Act" (or SECURE Act)


Congress has passed and the President has signed the "Setting Every Community Up for Retirement Enhancement Act" (or SECURE Act).  The legislation became effective January 1, 2020, and recognizes the growing number of Americans deciding to remain in the work force longer. The SECURE Act legislation contains a number of changes to retirement accounts and strategies.  These changes can impact both estate and retirement planning and may require new planning strategies. Here we quickly review some of the changes and potential impact on investments.

1. The age at which Required Minimum Distributions (RMDs) from qualified plans (401(k), TSP, 403(b) and IRAs) must begin has changed from the year in which the investor turns age 70.5 to 72. Note that this change applies to you if and only if you turn 70.5 in 2020 or later. If you turned 70.5 in 2019 or earlier, you must continue to take RMDs. There will be a revision to IRS Publication 590b that contains detailed guidance for RMDs. 

• This will allow investors a short delay in beginning their RMDs and it will also slightly lower the amount of funds that must be withdrawn from the qualified accounts annually. 

• The law will allow contributions to traditional IRAs regardless of an investor's age.  For investors who want to contribute to a Roth IRA but earn too much, they may still be eligible for a backdoor Roth IRA.  (Roth IRA earnings limits: MFJ=$193K - $203K for 2019, rising to $196K - $206K in 2020.  S= $122K - $137K in 2019, rising to $124K - $139K in 2020.)  

2. Investors will be allowed to aggregate an amount totaling $5,000 to be distributed from a retirement plan without the 10 percent penalty in the event of a qualified birth or adoption. The distribution would need to occur within one year of the adoption becoming final or the child being born.  For parents and others with 529 education savings accounts, the legislation allows tax-free withdrawals of as much as $10,000 for repayment of some student loans.

3. A significant change will be the elimination of the "stretch IRA."  The new provision will require heirs, other than surviving spouses, to completely withdrawal all funds from all inherited IRAs (traditional and Roth) within ten years. 

• RMDs are not required during the ten year period but the balance will have to be closed out by the end of year ten. 

• For the traditional IRAs, this could likely mean an increase in the tax burden for IRA heirs, as they will be required to withdraw the taxable funds over a much shorter period, ten years versus their IRS expected lifetime.  Surviving spouses will still be allowed to roll over inherited IRA funds to their own IRA and delay the RMDs until they turn 72.  [Surprisingly, the bill does not adjust the age an investor must reach, 70 1/2, before being eligible to make a Qualified Charitable Distribution (whereby investors are allowed to contribute to an IRS-approved charity directly from their IRA to the charity, and thus not have to first claim the funds as taxable income.)]  

This could have an impact on trusts previously written as “pass-through” or “see-through” trusts, with the intent of utilizing the “stretch IRA.” These trusts may need adjustments with the changes of the SECURE Act in mind. This is a topic to review and discuss with your estate planning attorney.

If changes to the Stretch IRA create concerns for your investments and qualified accounts, please don’t hesitate to reach out to your Relationship Manager or tax professional. Qualified savings accounts including TSP, 401(k), 403(b) and IRAs, traditional and Roth are still great savings accounts to utilize. 

Please feel free to contact your Relationship Manager if you have any questions.