Author: Ryan M. Vogel, CFP® - Chief Planning Officer
Three days ago, a piece of legislation called the SECURE act was attached to the year-end spending bill in congress. It is likely to become law by the end of this week. The SECURE act contains significant changes to retirement plans and IRAs. There are many different aspects of this bill, so we will start by focusing on the aspects that are most relevant to the type of client we work with and the different planning opportunities that go along with these changes. If this bill does pass, we will review the final version to see if any last-minute changes were made.
The rules regarding inherited IRAs are changing. Currently, when someone inherits an IRA, they can take withdrawals gradually over their lifetime. Under this new law, beneficiaries would need to withdraw the entire balance within ten years. This new law will only apply to beneficiaries of accounts where the owner passed away after December 31, 2019. There are exceptions to this rule, such as for surviving spouses among others, but for most beneficiaries this means that an inheritance coming in the form of a traditional IRA will be much less tax advantageous than it has been in the past.
This change has implications across all areas of financial planning. Based on our client’s goals, we will need to reconsider the form of contributions to retirement plans (traditional or Roth) as well as IRA conversions to Roth IRAs and weigh the benefits of paying taxes sooner rather than later. We will also be reviewing the estate plans of our clients; especially those who have trusts owning inherited IRAs and will reach out as needed with specific recommendations to our clients.
There will no longer be an age limit on the ability to contribute to a traditional IRA. This creates an opportunity for more people to take advantage of “back door” Roth IRA contributions by first contributing to a traditional IRA and then immediately converting that money into a Roth IRA. We will reach out during the upcoming tax season if you are eligible and if it is appropriate for your personal situation.
The required minimum distribution starting age will be increased from 701/2 to 72 (or perhaps even later depending on the final version of the bill). This will apply only to those who turn 701/2 after December 31, 2019. We are reviewing cash flow and charitable giving strategies for those who are impacted and will be in touch if changes are needed to your strategy.
Investments in retirement plans
The law opens the door for more annuities to be used in retirement plans. This won’t impact our clients much since we will likely recommend choosing other investment options. However, for employees of small plans, annuities might be the only option, which is a negative since internal expenses for these types of investments are usually high.
Other retirement plan changes
Retirement plans setup with an “opt out” instead of “opt in” enrollment will receive tax credits. This is good for employers and employees. Employers will receive a financial incentive to adopt these types of plans and employees will benefit from automatic savings.
Taxable non-tuition fellowship and stipend payments will now be treated as compensation for IRA purposes. In the past, if this was your only source of earned income, you couldn’t make IRA contributions. Now you can.
There will be several other changes brought about by the SECURE Act, but these are the ones we will focus on immediately and begin to reach out to our clients as needed based on their personal circumstances as soon as the bill becomes law.