Changes to retirement rules – implications of the SECURE Act

The SECURE Act was passed last month as part of a larger government spending bill. The new law is wide ranging, affecting retirees, heirs, those with 401(k)s, and 529 holders. The following are the most impactful sections of the new law.

New Rules on Inherited IRAs

• IRAs inherited from people who die after 1/1/2020 can no longer be stretched over the inheritor’s lifetime. Instead, they must be taken out within 10 years.
  • Exceptions are:
    • Surviving spouses
    • Children who are minors. The 10-year rule starts when they turn 18.
    • Disabled people
    • Chronically ill people
    • Anyone not more than 10 years younger than the IRA owner. Many siblings inheriting an IRA will be able to take it over their lifetime.
  • Implications of the new Inherited IRA Rules:
    • Adults near retirement may want to backload Inherited IRA distributions. For example, if you plan on working for another 6 years when you inherit an IRA, it probably makes sense to take no distributions for the next 6 years and then liquidate the account over the following 4 years.
    • For high earners, inheriting an IRA is not as appealing as it was before. For those nearing the end of their lives with high-income children, it may make sense to do Roth IRA conversions as you’ll be converting the IRA in a lower tax bracket than your child will be taking it out once they inherit it. This will be more important for those with large IRAs, fewer children, and high-income children.
  • Inherited IRAs from people who died in 2019 or before are grandfathered into the old rules of a lifetime stretch.

 

New Required Minimum Distribution Age (RMD) of 72 (was 70.5)

• For those born January 1^st through June 30^th, this delays the year of your first RMD by 2 years. For those born in the second half of the year it delays it by 1 year.
• The distribution schedule does not change. The age 72 factor is 25.6 so the first year distribution is 3.9%.
• Those who turned 70.5 in 2019 stay under the old rules. The later RMD age is only for those born 7/1/1949 and later.

 

No age limits to Traditional IRA contributions

• You still need earned income, but in the past, traditional IRA contributions weren’t allowed after age 70.5. Income rules/limitations still apply.
• This allows for Backdoor Roth IRA contributions for those over 70.5.

 

Annuities in 401(k)s

• Portable annuities may be offered going forward in 401(k)s.
• Despite its impact not being enormous, this feature is probably the reason the bill became law in the sense that insurance companies lobbied hard for the bill’s passage.
• We will have to see the kind of imbedded fees associated with the 401(k) annuities, but assuming they are akin to immediate annuities that are bought in the open market, this will be very good for insurance companies and not good for investors who choose annuities in their 401(k)s. We will follow up with another post detailing how bad of an investment purchased annuities are and how high the fees associated with them are.

 

Expanded 529 uses

• 529s can now be used to repay student loans. If you have loans and want a state tax deduction (if your state has one), you should run your payments through a 529.
• 529s can now be used to pay for expenses related to homeschooling.