Client Alerts The SECURE Act Likely to Affect Your Retirement and Estate Plans

02.10.20 | By: Frank L. Washelesky

The Setting Every Community Up for Retirement Enhancement (SECURE) Act brings numerous changes to the retirement and estate planning landscape, and some of them should prompt careful review of your existing plans to ensure they’ll accomplish the desired outcomes, including minimizing taxes.

read more

In late 2019, the first substantial legislation related to retirement savings since 2006 became law. The Setting Every Community Up for Retirement Enhancement (SECURE) Act brings numerous changes to the retirement and estate planning landscape, and some of them should prompt careful review of your existing plans to ensure they will accomplish the desired outcomes, including minimizing taxes.

The most significant provisions include the following changes:

Later IRA contributions

Prior to the SECURE Act, you could not contribute to traditional IRAs starting in the year for which you reach age 70½, even if you continued to work. The new law eliminates that restriction, instead allowing anyone with earned income to contribute. This change brings the rules for traditional IRAs in line with those for 401(k) plans and Roth IRAs.

The longer period to contribute takes effect for contributions for the 2020 tax year. While contributions for 2019 can be made as late as April 15, 2020, those contributions are permitted only for individuals under the age of 70½ as of the end of 2019.

Delayed Required Minimum Distributions

The SECURE Act eases the rules for required minimum distributions (RMDs) from traditional IRAs and other qualified plans. It generally raises the age at which you must begin to take RMDs — and pay taxes on them — from age 70½ to 72. This new rule, however, applies only to individuals who had not reached the age of 70½ as of the end of 2019.

Some taxpayers have turned to qualified charitable distributions (QCDs) as a tool for satisfying both their RMD requirements and their charitable inclinations. QCDs may be an attractive option because the Tax Cuts and Jobs Act (TCJA) has led more taxpayers to claim the standard deduction on their taxes, losing out on the federal tax benefits previously enjoyed by virtue of charitable contributions. With a QCD, you can distribute up to $100,000 per year directly to a 501(c)(3) charity once you reach age 70½, even if your RMD age is now 72. You do not receive a charitable deduction, but the distribution is excluded from your taxable income.

One wrinkle to note is that the aggregate amount of deductible IRA contributions made under the new rule extending the age for which deductible IRA contributions may be made (that is, those for years in which you have reached age 70½ and beyond) will reduce your QCD allowance going forward. This is the case only if those deductible IRA contributions have not already been used to reduce your QCD and are not below zero. Perhaps an oversimplified way of looking at it is that any deductible IRA contributions allowed because of the new rules will reduce what would otherwise be allowed as a QCD.

For example, suppose that at ages 71 and 72 you made deductible IRA contributions that, in total, equal $10,000. Then, at age 73, you make a QCD of $50,000. The QCD is limited to $40,000 – $50,000 less $10,000. Thus, $10,000 of your distribution is taxable. Note, however, that because $10,000 went to charity you will be eligible to claim that amount as an itemized deduction.

Effectively eliminated “stretch” Required Minimum Distributions

Perhaps more important for some estate plans, the SECURE Act eliminates so-called “stretch” RMD provisions that have allowed the beneficiaries of inherited defined contribution accounts to spread the distributions over their life expectancies. Younger beneficiaries could use the provision to take smaller distributions and defer taxes while the accounts grew.

Under the SECURE Act, most beneficiaries must withdraw the entire balance of an account within ten years of the owner’s death, albeit not according to any set schedule (they can wait and withdraw the entire amount at the end of ten years if they wish).

Be aware that the new rules apply only to those inheriting from someone who died after 2019. Thus, if you inherited an IRA years ago you are not subject to the new rules with respect to your RMDs. However, when your beneficiaries inherit the IRA from you, they will be subject to the new rules.

The law recognizes exceptions for the following types of beneficiaries:

  • Surviving spouses;
  • Children younger than “the age of majority” (the ten-year rule applies when such beneficiaries reach the age of majority);
  • Disabled or chronically ill individuals; and
  • Individuals who are no more than ten years younger than the account owner.

The ten-year requirement also applies to trusts, including see-through or conduit trusts that use the age of the oldest beneficiary to stretch RMDs and prevent young or spendthrift beneficiaries from quickly depleting the inherited accounts.

If you have counted on stretch RMDs, you might achieve the same goals by naming a charitable remainder trust (CRT) as the beneficiary of your account, with your children as the trust’s income beneficiaries. The CRT would provide your children an income stream for a specified number of years or until their deaths and then pass the remainder to charity. Plus, your estate could take a deduction equal to the present value of the charity’s remainder interest.

Roth conversions are another avenue to consider. Moving money from a pre-tax IRA account to an after-tax Roth IRA during your retirement preempts RMDs during your life and any subsequent growth in the account would be tax-free. Plus, your beneficiaries will not be subject to tax on any distributions they take.

Keep in mind that you will owe tax as a result of the conversion, though you need not convert the entire account at once. Making the conversions strategically, over a number of years, may help to manage the tax implications. Roth conversions require consideration of several factors, so consult with your ORBA advisor before taking the plunge.

Penalty-free withdrawals for birth or adoption

The SECURE Act creates a new exemption for qualified births or adoptions from the ten percent tax penalty on early withdrawals from defined contribution plans. You can withdraw an aggregate of $5,000 from a plan without penalty within one year of the birth of a child or an adoption of a minor or an individual physically or mentally incapable of self-support.

Couples in which both parents have separate retirement plans can withdraw an aggregate of $10,000 penalty-free (eligible adoptees do not include the child of your spouse). Such withdrawals are subject to ordinary income tax.

Expanded options for use of 529 plans

Under the SECURE Act, you can use 529 plans to pay as much as $10,000 of principal and interest on qualified education loans for a plan beneficiary. The law also permits plan distributions, subject to the same limit, to pay off qualified student loan debt for the beneficiary’s siblings.

529 plans are expanded to include apprenticeship programs, too. Distributions can be made to such programs for costs related to fees, books, supplies and equipment necessary for program participation.

Kiddie tax reversion

The TCJA changed the kiddie tax rules, generally making unearned income generated by children over a certain threshold taxable at the tax rates for trusts and estates, rather than the generally lower rates of their parents. The SECURE Act reverses course, so a child’s unearned income will return to being taxed at the parents’ highest marginal rate.

The law provides the option to calculate the kiddie tax for 2019 under the TCJA or SECURE Act rules. You can also amend your 2018 tax returns to apply the new rule if financially worthwhile.

Act now

With most of the SECURE Act’s provisions already in effect, you cannot afford to stall on reviewing your plans and making the necessary adjustments to satisfy long-term objectives. Please contact us with any questions.

For more information, contact Frank Washelesky at [email protected] or 312.670.7444.

© 2020

News & Events

view all

Forward ThinkingClient Alerts

view all

seminars & events


ORBA will gladly provide you with hard copies of the useful guides listed below. Select which guides you would like to receive and submit the form below.

  • Tax Pocket Guide
  • Tax Planning Guide
  • Records Retention Schedule
  • Auto, Travel & Business Log

request guide

Forward Thinking
Forward Thinking