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Major Changes to Retirement Laws – The Ground is Shifting Beneath Your Feet
Earlier this year, the House of Representatives voted 417-3 to pass the SECURE Act, formally known as the Setting Up Every Community for Retirement Enhancement Act. A similar measure had been stalled in the Senate until this week. At the last minute, this piece of legislation was attached to the spending appropriations bill which was passed by the Senate to avoid a government shutdown on Thursday. While there will be much more on the exact details of this bill later, this legislation will be the most significant piece of law to affect the retirement landscape in the last 20 years. It will take effect starting January 1, 2020.
For our clients and those who are retired, there is some good news. If you turn 70.5 in 2020 or later, your RMD’s (Required Minimum Distributions) will be pushed back until age 72. No more figuring out the 70.5 half birthday date. 72 is much clearer and pushes those distributions back further. A major planning opportunity will be given more time to be taken advantage of, Roth IRA conversions. This will only affect you if you are not currently subject to RMD’s. One of the new planning items we will also have available, is the lifting of a maximum age for Traditional IRA contributions. Previously, you could not contribute into a Traditional IRA if you were over 70.5. This lifts the age cap on that as many individuals continue to work part time jobs into their 70s. Another planning item available, is that QCD’s (Qualified Charitable Distributions) appear to still be eligible at age 70.5. So, even though you may not be subject to RMD’s you may realize a greater tax benefit via direct charitable giving from your IRA rather than itemizing those deductions.
The other major change is regarding the beneficiaries of Traditional IRA’s and other pre-tax retirement plans. The SECURE act will eliminate the “stretch option” for beneficiaries other than your spouse, such as your children. The “stretch option” allowed children or other non-spouse beneficiaries to take required distributions over their lifetimes and minimize the taxes paid. The distribution requirement for a non-spouse or non-exempt beneficiary will now have to be distributed at the end of 10 years once inherited. This is extremely significant as the tax impact may be severe for some by shortening the mandatory distribution period to 10 years. Current stretch beneficiaries will not be affected but will apply to every new beneficiary starting January 1, 2020. Some exceptions to this new rule are: Surviving spouses, disabled beneficiaries, chronically ill beneficiaries, beneficiaries that are not more than 10 years younger than the owner and minor children. This will also apply to all Traditional IRA’s, 401(k)’s, 403(b)’s and other pre-tax defined contribution plans. There are a few exceptions to these plans, and you should check with your tax advisor if you are subject.
There are a few other changes regarding 529 plans and small-business retirement plans that are aimed at helping those with student loans and small businesses establish retirement plans. That may be covered in another article once we have the final details on this legislation. We think that while this will require many to re-visit planning already done, there are new opportunities for those who are retired or soon to be retired. You should at a minimum be reviewing your estate plan and named beneficiaries with your professional team.
The views are those of Robert Jeter CFP ®, CRPC and Eric Johnston, CFP and should not be construed as specific investment or financial planning advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. You should consult your tax or legal advisor for advice on your specific situation.
Investments in securities do not offer a fixed rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and, when sold or redeemed, you may receive more or less than originally invested. No system or financial planning strategy can guarantee future results.
Investment Advisor Representative offering securities and advisory services offered through Cetera Advisors LLC, member FINRA/SIPC, a broker dealer and a Registered Investment Adviser. Cetera is under separate ownership from any other named entity. 327 Tilghman Rd., Suite 100, Salisbury, MD 21804.