INDUSTRY INSIGHT
YOUR FINANCES
SPONSORED CONTENT
SECURE or INSECURE ACT:
What Implications
Does This New Law
Have for You?
PART 1
P
art of our job as financial advisors is to stay on top of current
legislation that may impact our clients. One such piece of
legislation, the Setting Every Community Up for Retirement
Enhancement (SECURE) Act, was passed in December of
2019 as part of an appropriations bill. Much of it went into effect on
January 1, 2020. The Act involves provisions relating to individuals as
well as companies. The next two articles will be a two-part discussion
of the important provisions of this Act. Part 1 will focus on the impact
on families and individuals. Read our article in the next edition for
the impact on small businesses and retirement plans! A few parts of
the Act are favorable, but there is one part that will require significant
planning on several fronts for many people. We will discuss the
favorable provisions first.
AGE CHANGE FOR REQUIRED MINIMUM DISTRIBUTIONS (RMDs)
FROM IRAs/401(K)s
The Act will change the age for taking RMDs from 70½ to 72. This
is a benefit to those who do not wish to take these distributions but
instead leave the money in the accounts growing tax-deferred for as
long as possible. This provision only applies to people who turn 70½
in 2020 or after. For those who are already receiving RMDs, they must
continue them.
IRA CONTRIBUTION AGE RESTRICTION LIFTED
IRA owners are now allowed to make contributions at any age
if they continue to have earnings from employment, rather than
being forced to stop at age 70½. However, if they plan to make a
charitable contribution from their accounts in the same year they are
contributing to them, the $100,000 maximum deductible amount will
be reduced by the amount of the IRA contribution.
IRA/401(K) DISTRIBUTIONS NOW ALLOWED FOR QUALIFIED
BIRTHS/ADOPTIONS
Individuals can now take up to $5,000 from an IRA for qualified
expenses related to a birth or adoption of a child without penalty.
There will still be ordinary income taxes due if it is pre-tax money in
the plan.
STRETCH IRA ELIMINATED
This is the part of the Act that will cause the most angst for
many people. The Stretch IRA, which allowed non-spouse heirs of
retirement plans/IRAs to stretch distributions over their lifetime, has
been eliminated. The Stretch IRA allowed beneficiaries to spread the
distributions, and therefore the taxes, over their life expectancies. The
Act now requires distributions to be taken over 10 years maximum.
This becomes an issue when, for example, a parent dies and leaves
the IRA to one or more children. The children must take distribution
over 10 years, unless they are minors. If the IRA is large, this could
force beneficiaries into a much higher tax bracket for 10 years.
(NOTE: There are 5 classes of beneficiaries who are still eligible for
the Stretch: surviving spouses, minor children [not grandchildren]
until they reach age of majority, disabled individuals, chronically ill
individuals, and individuals within 10 years of age of the IRA owner
[mostly siblings].) Significant planning may be necessary to combat
this issue. One example is that IRA Trusts that have been set up as part
of estate planning may no longer be beneficial. Those who have a
trust named as their retirement plan/IRA beneficiary should call their
estate planning attorney.
There are a few potential fixes for this issue:
(1.) The IRA owner may convert the retirement plan/IRA to a Roth
IRA over time, thereby paying the taxes over the time before
the heirs receive the asset. This could reduce the amount of tax
due over time, since the conversions will likely take place when
the IRA is worth less (assuming it grows over time).
(2.) Life insurance is another potential solution to this problem.
Families may consider a life insurance policy to pay for the tax
hit of having to cash in the IRA more rapidly.
(3.) The retirement plan/IRA can be used for charitable giving, and
other assets can pass to heirs.
(4.) Distributions can be taken by the owner earlier than age 72 to
spread out the taxes over time.
(5.) Get married if you are not, since spouses can still stretch the
IRA over their lifetimes!
The bottom line is that the SECURE Act will require many people
to do significant planning to avoid major tax hits in the future. The
potential ramifications of this Act and other legislation are a great
example of why people should hire a financial advisor.
This Industry Insight was written by David W. Hoffmann.
David W. Hoffmann, CFP®, AIF® of H Financial
Management, is a private wealth manager based
in Southpointe serving the ever-changing financial
needs of his clients. Please contact David at H Financial
Management, 400 Southpointe Blvd., #420, Canonsburg,
PA 15317, Phone: 724.745.9406,
Email: [email protected], or via the
Web: www.hfinancialmanagement.com.
Securities offered through Triad Advisors, LLC, Member
FINRA/SIPC • Advisory Services offered through H Financial
Management.
H Financial Management is not affiliated with Triad
Advisors, LLC.
PETERS TOWNSHIP
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FEBRUARY/MARCH 2020
51