The SECURE Act: Understand the Retirement and Estate Planning Implications
If you have significant savings set aside in an IRA, 401(k) plan or similar account, the Setting Every Community Up for Retirement Enhancement (SECURE) Act likely alters your retirement and estate planning strategies. Signed into law in December 2019, the Act changes the rules about contributions to and distributions from these plans, as well as the tax impact on those who inherit them. Let’s take a closer look at the highlights of the SECURE Act.
Required minimum distributions
People with traditional IRAs or non-Roth 401(k) plan accounts had to begin required minimum distributions (RMDs) no later than April 1 of the year following the year in which they reached age 70½. If your 70th birthday was June 1, 2019, for example, you had to take your first RMD by April 1, 2020.
The SECURE Act delays the RMD start date to April 1 of the year following the year in which a person reaches age 72, allowing an additional year or two of tax-deferred growth.
This change applies to people who turn 70½ after December 31, 2019. In other words, if your 70th birthday was before July 1, 2019, the old rules still apply. If you turned 70 on July 1, 2019, or later, you can take advantage of the later RMD start date.
If you reached or will reach age 70½ in 2020, you may have previously planned to take an RMD this year. Talk to your ORBA advisor about changing your withdrawal schedule to take advantage of the later start date.
Contributions to a traditional IRA were not permitted past age 70½. Roth IRA contributions, on the other hand, were permissible at any age so long as the other requirements were met.
The SECURE Act lifts the age restriction on contributing to a traditional IRA. Now, people who continue to work can contribute to their traditional IRAs regardless of age, so long as the other requirements are met. Keep in mind that, even though a contribution may be permitted, it may not be deductible.
Tax years beginning after December 31, 2019.
If you are age 70½ or older and still employed, consider including IRA contributions as part of your retirement savings strategy.
Generally, employees who worked less than 1,000 hours per year were ineligible for their companies’ 401(k) plans.
Employers with 401(k) plans (except for certain collectively bargained plans) are required to allow qualifying long-term, part-time employees to participate. To qualify, an employee must: 1) meet the plan’s normal eligibility requirements; 2) have completed at least three consecutive 12-month periods of employment; and 3) have been credited with at least 500 hours of service in each of those periods.
This change applies to plan years beginning after December 31, 2020. In addition, employers need not count 12-month periods beginning before January 1, 2021, in determining eligibility. That means employers will not be required to allow part-time employees to participate until 2024.
If you work part-time or are considering doing so in the future, assess the impact of this change on your retirement planning strategies.
Spouses who inherited an IRA or 401(k) plan could roll the funds into an IRA in their own name and allow the funds to continue growing on a tax-deferred basis until they begin taking RMDs. Nonspousal beneficiaries were able to place the funds in an “inherited IRA” and stretch RMDs over their life expectancies.
In one of its few changes that do not benefit taxpayers, the SECURE Act eliminates so-called “stretch IRAs.” Now, nonspousal beneficiaries of traditional IRAs or non-Roth 401(k)s must withdraw the funds within ten years (with exceptions for certain minor children, disabled or chronically ill beneficiaries, or beneficiaries who are less than ten years younger than the donor). The Act did not change the treatment of spousal beneficiaries.
Distributions with respect to account owners who die after December 31, 2019.
Account owners with nonspousal beneficiaries (including beneficiaries of certain trusts that hold IRAs) should assess the tax impact of an accelerated distribution schedule on their heirs, and determine whether any other strategies could soften the tax blow and help them meet other objectives as well.
Consult Your Advisor
In light of these and other changes made by the SECURE Act, it is a good idea to consult your ORBA advisor to evaluate the Act’s impact and revisit (and revise if necessary) your retirement and estate planning plans.
Sidebar: Impact of SECURE Act on employers
If you are a business owner, the Setting Every Community Up for Retirement Enhancement (SECURE) Act includes several provisions that make it easier to offer qualified retirement plans for yourself and your employees. The most significant change is the creation of “pooled employer plans” (PEPs).
PEPs are multiple employer plans (MEPs) available to unrelated employers, allowing them to take advantage of economies of scale to reduce the cost of employer-provided retirement plans. Previously, MEPs were not a viable option for many businesses because: 1) they required participating employers to have a “commonality of interest,” such as a common industry or geographic area; and 2) they were subject to a “one bad apple” rule, under which one participating employer’s compliance failure jeopardized the entire plan.
The SECURE Act eliminates these requirements, beginning in 2021, making the benefits of MEPs available to far more employers. PEPs will be sponsored by financial services companies, insurance companies and other providers. The Act also increases certain tax credits available to businesses that maintain qualified retirement plans.
Tax Tips: Take Advantage of the Temporary Gift Tax Break
The Tax Cuts and Jobs Act temporarily doubled the federal gift and estate tax exemption through 2025. Adjusted for inflation, the exemption currently allows an individual to transfer up to $11.58 million free of federal gift or estate tax. Married couples can shield up to $23.16 million from those taxes. These sizable exemption amounts create an attractive opportunity to minimize taxes on your wealth by gifting business interests or other assets to family members before they drop to their previous levels of $5 million and $10 million, respectively (adjusted for inflation) on January 1, 2026.
Some affluent families have been reluctant to take advantage of this opportunity for fear of a “clawback.” In other words, there was a risk that a portion of their pre-2026 gifts may be clawed back and subject to estate taxes if the exemption amount is lower when they die. Although Congress did not appear to intend such a result, a literal reading of the tax code suggested that previous gifts could be added back into one’s estate and subject to tax based on the exemption amount in effect in the year of death. Fortunately, IRS regulations finalized in November 2019 provide assurances that this would not happen.
Time for a cost segregation study?
Is your business planning to acquire, construct or substantially improve a building? Did it do so during the last several years? If so, consider a cost segregation study. These studies identify building costs that are properly allocable to tangible personal property rather than real property. And this allows your business to accelerate depreciation deductions, reduce taxes and boost cash flow. Cost segregation studies are particularly valuable now because they can enhance the benefits of bonus depreciation, which allows you to immediately deduct 100% of the cost of qualifying assets placed in service after September 27, 2017, and before January 1, 2023 (after 2022, bonus depreciation will be phased out over four years).
Watch out for audit red flags
The chances of being audited by the IRS have been shrinking in recent years, down to only 0.45% for the 2019 fiscal year. But there are several red flags that can increase the probability of IRS scrutiny. Examples include filing Schedule C for a business (especially if it includes significant income or large home office deductions), taking higher-than-average deductions, claiming significant rental losses, writing off “hobby” losses, claiming 100% business use of a vehicle and taking large deductions for business meals and travel.
Related Read: Don’t Panic: How to Prepare for an IRS Audit