New Year…New IRA Rules
By: Bill Van Sant, Senior Vice President and Managing Director, Girard, a Univest Wealth Division
Quietly, in the week before Christmas, the President signed into the law The Setting Every Community Up for Retirement Enhancement Act of 2019, better known as the SECURE Act. The SECURE Act, as the name implies, is designed to ‘secure’ opportunities for individuals to increase their retirement savings, but there is a lot more to this bill than allowing folks to save more for retirement. The SECURE Act went into effect on January 1, 2020 and will most likely impact retirement planning for many individuals. Instead of breaking down the entire Act, we will address several of the key positive highlights of the Act along with one, not-so-positive highlight.
First, the good…
No age restriction on traditional IRA contributions:
Previously, individuals were not allowed to make contributions to their traditional IRA’s once they reached the age of 70 ½. Beginning in 2020, individuals can continue to make traditional IRA contributions over the age of 70 ½ if they have earned income from either wages or self-employment.
Key takeaway: If you are still working, whether full time or part time, check with your accountant to see if you are eligible take advantage of this new provision in order to keep your retirement savings growing.
Required Minimum Distribution (‘RMD’) age is now 72:
For decades, the age to take a required minimum distribution was stuck at 70 ½ despite people living longer and not necessarily needing to take taxable distributions from their IRAs. Now, individuals have an extra year and a half before being forced to take a distribution from their IRAs. You have until April 1st of the year following your 72nd birthday to initiate your RMD. Additionally, you do not have to worry about calculating your ½ birthday any longer, which has always been confusing (rightly so) to individuals and advisors. YAY!
Key takeaways: Like many of the provisions contained within this Act, this goes into effect for individuals who turn 70 ½ AFTER 12/31/19. So, if you literally turned 70 ½ on 12/31/19, you are still required to take your RMD by 4/1/2020 and will need to continue doing so for as long as the IRA has a balance.
It is important to note that for those who are Charitably minded, this Act still allows you to initiate Qualified Charitable Distributions (‘QCD’) from your IRA, tax-free, beginning at 70 ½. In addition to being tax-free, QCD’s will also count against your RMD, but now with the law pushing the RMD age to 72, individuals may find themselves in a unique one-two-year window where IRA distributions qualify as a QCD, but not as RMDs.
Expanded uses for 529:
It was not long ago, with the passage of the Tax Cuts and Jobs Act of 2017, that 529 owners were allowed, for the first time, to use 529 assets, up to $10,000 annually, to pay for education expenses related to grades K-12 (in addition to college). Now, the SECURE Act expands this list to include expenses related to Apprenticeship Programs (provided the program is appropriately registered and certified with the Department of Labor) and the ability to use up to $10,000 to pay toward qualified student loan debt.
Key takeaway: With student loan debt around $1.5 trillion, this is a nice feature to have for 529 owners who have balances left within their 529's that were intended to be used for other, younger beneficiaries who may not have needed the money.
Now, the not-so-good…
Goodbye to the Stretch IRA:
For years, we have worked with client’s non-spouse beneficiaries in helping them ‘stretch’ their inherited IRAs over their, typically longer, life expectancy. This allowed the beneficiary to comply with IRS rules, while continuing to allow their inherited IRA to compound, tax-deferred for their future benefit. Starting in 2020, that goes away. For anyone who dies in 2020 or beyond and leaves their IRA to a non-spouse beneficiary or any ‘Eligible Designated Beneficiaries,’ that beneficiary will need to deplete the account within 10 years. Congress estimates that putting a cap on the ‘stretch’ IRA will generate almost $16 billion in tax revenue within the next decade. Good for the government, not so good for beneficiaries.
Key takeaways: Many individuals will be affected by this provision, so it is important that they plan accordingly. Additionally, if you have any conduit or pass-through trusts in place to receive your IRA proceeds upon your death, you are going to have to review them as they are most likely useless given this new law. Also, there are a list of Eligible Designated Beneficiaries who may not have to follow this new rule to its fullest extent.
These are just a few of the high-level provisions contained within the SECURE Act. We encourage you, as you begin 2020, to reach out to a Girard Wealth Advisor to see how these changes may affect you and your financial plan and discuss the appropriate solutions accordingly. We look forward to serving you!
These articles and reports are for general information purposes only and are not intended to provide legal, tax, accounting or financial advice. The information in these articles or reports, and any opinions expressed therein, do not constitute a recommendation or an offer to buy or sell any security or financial instrument. Viewers should consult with their financial and/or legal professionals before making any financial decisions.
Girard is a marketing name used by Univest Financial Corporation to provide (1) investment and wealth management, fiduciary services and trust services through its subsidiary Univest Bank and Trust Co., (2) specific fiduciary and investment advisory services through Girard Advisory Services, LLC (3) securities products, insurance products and brokerage services through Girard Investment Services, LLC, a registered broker-dealer and member of FINRA and SIPC, and a licensed insurance agency, and (4) investment management and related products and services for Pennsylvania municipal entities through Girard Pension Services, LLC. Investment products and services are not FDIC insured, not a bank deposit, not bank guaranteed, not insured by any federal government agency and are subject to risks, including possible loss of any principal amount invested.