On December 20, 2019 the SECURE Act (Setting Every Community Up for Retirement Enhancement) was signed into law.  The provisions mostly went into effect on January 1, 2020. 

In my opinion, here are some of the more favorable provisions of the new law:

• • More time in IRAs and 401(k)s. The bill raises the age for required minimum distributions (RMDs) from 70 1/2 to 72 years old*.  The change only affects people who turn 70 ½ after 2019.  If you were already taking an RMD, this will have no effect.

• • Grant older workers benefits. As long as you’re working, you can still contribute to your Traditional IRA after age 70 ½*.  Previously, you couldn’t.  However, if you were over 70 ½ in 2019, you cannot make a 2019 contribution.   This provision would take effect in the 2020 tax year.

• • Annuity adoptions. Will allow employer-sponsored 401(k) plans to add annuities as investment options*.  Not sure how the 401(k) community will respond to this provision.  We would strongly suggest that you reach out to us prior to allocating part of your 401k into an annuity. 

• • 529 plans. They can be used to repay up to $10,000 in student loans for the beneficiary and for each the beneficiary’s siblings*.  These are both lifetime limits.  Also, any interest paid is ineligible for the student loan interest deduction.  Not sure this will have much impact.   If you have student loans, you likely wouldn’t have 529 plan accounts to pay for the loans.   However, I suspect there is an earnings angle if you have deferred interest on your loans.

Of all the details of this Act, there is one piece that will likely get the most attention.  That is the treatment of Stretch IRAs.   Prior to the SECURE Act, if you had a non-spouse beneficiary of an IRA, they could choose to receive the funds immediately through a lump sum, over 5 years, or over the beneficiary’s life expectancy **.

In the most extreme example, a grandparent could name their grandchild as the beneficiary of their IRA and the grandchild would be able to distribute those funds over the course of their entire life. This was especially effective for distributing Roth IRAs, since you had years of tax deferred growth for your tax-free withdrawals.

Under the provisions of the SECURE Act, the non-spouse beneficiary can “stretch” their IRA to a maximum of 10 years.   This significantly limits a common estate planning strategy for high net worth individuals.   Keep in mind, for non-spouse Beneficiary IRAs that were in existence prior to 2020, the old stretch rules still apply.

              During your 2020 annual review, we will discuss any details of the Act that may pertain to your overall strategy.  In the meantime, if you have any questions, don’t hesitate to reach out to our team for guidance.

Sources: *SECURE Act, signed by President, a game-changer for retirement plans, The Philadelphia Enquirer, Dec 23, 2019, **The Stretch IRA is Dead, Investment News, December 27, 2019.

A 529 plan is a tax-advantaged investment program designed to help pay for qualified education expenses.  Participation in a 529 plan does not guarantee that the contributions and investment returns will be adequate to cover education expenses.  Contributors to the plan assume all investment risk, including the potential for loss of principal, and any penalties for non-educational withdrawals. Your state of residence may offer state tax advantages to residents who participate in the in-state plan, subject to meeting certain conditions or requirements.  You may miss out on certain state tax advantages should you choose another state’s 529 plan. Any state-based benefits should be one of many appropriately weighted factors to be considered in making an investment decision.  You should consult with your financial, tax or other advisor to learn more about how state-based benefits (including any limitations) would apply to your specific circumstances.  You may also wish to contact your home state’s 529 plan Program Administrator to learn more about the benefits that might be available to you by investing in the in-state plan. Investors should consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing. This information is found in the issuer’s official statement and should be read carefully before investing. 

Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59½, may be subject to an additional 10% IRS tax penalty. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.

The guarantee of an annuity is backed by the claims paying ability of the issuing insurance company.

Although it is possible to have guaranteed income for life with a fixed annuity, there is no assurance that this income will keep up with inflation. There is a surrender charge imposed generally during the first 5 to 7 years or during the rate guarantee period.

There is a surrender charge imposed generally during the first 5 to 7 years that you own a variable annuity contract. Withdrawals prior to age 59½ may result in a 10% IRS tax penalty, in addition to any ordinary income tax. Investment sub-account values will fluctuate with changes in market conditions. An investment in a variable annuity involves investment risk, including possible loss of principal. Variable annuities are designed for long-term investing. The contract, when redeemed, may be worth more or less than the total amount invested. Variable annuities are subject to insurance-related charges including mortality and expense charges, administrative fees, and the expenses associated with the underlying sub-accounts. Investors should consider the investment objectives, risks and charges and expenses of the variable annuity carefully before investing. The prospectus contains this and other information about the variable annuity. Contact your financial professional to obtain a prospectus, which should be read carefully before investing or sending money.

2895157/DOFU 1-2020