Retirement Plan Changes

By Christopher Gallo   |   February 27, 2020

A new Federal law passed in December has made sweeping changes to the retirement plans used by most Americans. The SECURE (Setting Up Every Community for Retirement Enhancement) Act brings with it many benefits, including pushing back the mandatory retirement distribution age for IRAs, but the cost is the removal of the popular “stretch IRA” provision for distributions.

First, the benefits of the new SECURE Act. Previous IRA rules required owners to begin distribution during the year they turned age 70 ½, essentially turning on the income spigot and taxing this income. The new Act pushed the required age of distribution to 72, giving you a few more years of tax-deferred accumulation. In another positive move, there was previously a maximum age of 70 ½ to contribute into your IRA – this has been removed and there is no longer an age limit for which to put contribute to an IRA so long as you have earned income.

There are variety of other positives for retirement plans, but one other significant change is to 529 plans, the popular tax-deferred education savings accounts. Alongside qualified distributions for college expenses, which were always tax free, and private school costs up to $10,000 each year, which were made tax free a few years ago, the Act adds a few more tax-exempt distributions: $10,000 each year for qualified student loan repayments, costs of a religious school, and costs for a registered apprenticeship.

One positive recent piece of legislation that was not changed was the recently permanent law allowing up to $100,000 per year from an IRA to be distributed to a qualified charity without paying taxes.

On the other side, many IRA owners with large balances who had planned to bequeath these assets to their children are losing a key feature – the so-called “stretch IRA” provision. Simply put any non-spouse beneficiary of an IRA was previously allowed to stretch distributions over their lifetime, allowing younger beneficiaries to have the assets grow tax deferred and keep mandatory distributions and taxes low. This rule has been changed to mandate a maximum 10-year distribution period to beneficiaries (that are not a spouse) and popular IRA trusts. This may mean re-working previous estate plans and perhaps incorporating life insurance trusts, the use of charitable remainder trusts and conversion to Roth IRAs in order to minimize the costs of this new Act.

I encourage you to discuss these changes and how they may affect you with your advisors, estate planning attorney and CPA before making any changes.


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