SECURE Act Makes Major Changes to Retirement Plans and Other Tax Provisions
Brent W. Herrin
While most of us were doing last minute Christmas shopping on December 20, 2019, in an act of bipartisan unity, Congress passed and the President signed a governmental appropriations bill which prevented a government shut-down for Christmas. This appropriations bill also included the Setting Every Community Up for Retirement Enhancement (SECURE) Act.
Here are a few major changes most people need to know about:
1. End of the “Stretch IRA”
The “stretch IRA” has been a major tax planning strategy. The “stretch IRA” allowed a non-spousal beneficiary of an IRA to stretch out the payments over the beneficiary’s life expectancy. Depending on the marginal tax rate of the beneficiary and the size of the IRA, this strategy could save significant income taxes. Under the SECURE Act, generally the non-spousal beneficiary must take a distribution of the full value of the IRA by the end of the 10th calendar year following the IRA owner’s death.
Many people used their estate planning documents to ensure the benefit of the “stretch IRA.” Clients should have their estate planning documents reviewed to see if changes need to be made to ensure tax efficiency with the new law.
2. Age for Required Minimum Distributions
Previously a traditional (as opposed to Roth) IRA owner or qualified plan participant had to start taking his or her required minimum distribution (RMD) at age 70½. The purpose for this law was to prevent individuals from using retirement savings as a wealth transfer device. However, with individuals living longer, the SECURE Act changes the starting date for RMDs to age 72.
3. Age Limits for IRA Contributions
Previously if you were age 70½ you could not contribute to a traditional IRA. The SECURE Act repeals the age limit for contributing to an IRA.
4. Expanded Use for 529 Plans
Beneficiaries of 529 plans may now use the assets of such plans to pay for certified apprenticeships and up to $10,000 for repayment of qualified student loans.
5. Employer Qualified Plan Changes
The SECURE Act also changes qualified plan rules. The law now requires employers to allow participation in 401(k) plans for certain part-time employees (working over 500 hours per year over a three-year period). The cap on the percent of wages subject to the automatic salary deferral increases to 15% from 10%. The law also increases the tax credits small employers may use to offset the expenses for setting up or changing 401(k) plans.
6. Other Miscellaneous Changes
The SECURE Act also allows for penalty-free withdrawals from IRAs or qualified plans of up to $5,000 to cover the cost for the adoption or birth of a child. The new law also treats certain taxable non-tuition fellowship and stipend payments as compensation for IRA contribution purposes.
With these changes, clients should have their estate planning documents reviewed to make sure their documents are providing them the most tax efficient distribution of their assets. To have your documents reviewed or if you have questions regarding these recent law changes, please contact Brent Herrin at bherrin@smallherrin.com or at (770) 857-1664.
Brent W. Herrin is the managing partner of Small Herrin, LLP. Brent focuses his practice on Family Wealth Planning and Tax, Fiduciary Litigation, and Higher Education and Accreditation.
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