Mason & Associates, LLC

SECURE Act (“Setting Every Community Up for Retirement Enhancement”)

Tommy Blackburn, CFP®, CPA, PFS & John M. Mason, CFP® 

The SECURE Act and certain “Tax Extenders” were passed by both the House and Senate in conjunction with the recent budget, appropriations, and spending legislation.  The SECURE Act and the Tax Extenders were added quietly and somewhat surprisingly as many believed that these two items were dead in the water.  The SECURE Act has several large implications that will impact our clients, their children, and future generations of Americans. 

New Required Minimum Distribution (RMD) Age

The start date for Required Minimum Distributions (RMDs) under the SECURE act has been changed from 70 ½ years of age to 72. However, this change only applies to those who had not already reached the age 70 ½ RMD beginning age by the end of 2019.  If you were 70 ½ or older in 2019, the old rules still apply to you.

Mason Take:

This is positive news.  Although the one and a half years is not a massive change, it is still an advantage. Delaying RMDs until age 72 provides retirees with more planning opportunities. Clients will have the ability to do more tax planning, specifically Roth conversions, until age 72 when large taxable IRA distributions are forced upon them. 
 

Qualified Charitable Distributions

Interestingly, Qualified Charitable Distributions (QCDs) still can begin at age 70 ½.  Previously, an individual’s ability to execute a QCD coincided with the first RMD requirement. This was logical because a Qualified Charitable Distribution can satisfy charitable giving goals as well as required minimum distributions.  While the SECURE Act delayed the start date of RMD until age 72, it did not alter the QCD eligibility age. 
 

Mason Take:

We will discuss charitable giving goals with each family during a Strategic Planning Meeting and ensure that we have a plan in place to accomplish these goals as efficiently as possible.  At this time, we do not believe an update will be passed to align QCD and RMD ages as they were prior to the SECURE Act. 
 

IRA Contribution Age Limit Removed

The SECURE Act provides taxpayers the ability to fund Traditional IRAs after attaining age 70 ½.  Previously, taxpayers were not allowed to contribute to Traditional IRAs after 70 ½, but were allowed to contribute to Roth IRAs. This change makes sense due to the fact that people are working longer than ever before. Although the age limit for contributing to a Traditional IRA has been eliminated, one must still have earned income (compensation) to contribute to an IRA or Roth IRA. Keep in mind that if one spouse is working, both spouses could still potentially contribute to a Traditional or Roth IRA.
The ability to fund pre-tax IRAs after age 70 ½ creates a complication for those who also wish to execute a Qualified Charitable Distribution.  The anti-abuse clause prevents taxpayers from deducting an IRA contribution and then also immediately using the QCD strategy.  Essentially, this is in place so that one can’t receive the pre-tax benefit of contributing to an IRA and then the tax-favored treatment of a QCD in the same year. 

Mason Take:

We have a lot to digest with the new rules. We don’t anticipate taking advantage of this new rule very often as most of our clients are fully retired at age 70 ½. However, we are actively looking for strategies that will benefit current and future clients. 

Stretch IRA (Inherited IRA Required Minimum Distributions Spread over a Beneficiary’s Lifetime) Abolished

The abolishment of the Stretch IRA will have massive impacts on wealth and portfolio values for generations. The inherited retirement account distribution rules previously allowed non-spouse beneficiaries to maintain the tax-advantaged retirement account as long as required minimum distributions were met annually.  The previous rules provided taxpayers with a great deal of flexibility, specifically with the ability to control the amount distributed that exceeded the required distribution. The SECURE Act eliminates the ability for certain non-spouse beneficiaries to maintain the tax-advantaged account and actually mandates that the account be liquidated in 10 years. The 10 year time frame will force out larger distributions at a much faster rate. Although there are still tax planning strategies, taxpayers will have a compressed time frame for planning and the likely result will be increased revenue to the United States Government. The changes will impact retirement accounts that are inherited in 2020, specifically accounts inherited by non-spouse beneficiaries or another exempt person. The SECURE Act does not change anything for accounts that were inherited prior to 2020. 
Unlike the previous rules, there is actually no required distribution from retirement accounts inherited in 2020 which would effectively allow a taxpayer to delay any distributions until the 10th year. 

Mason Take:

WOW! The increase in federal revenue and the decrease in wealth will be drastic. Possible planning strategies include:
 
1. Timing Inherited IRA/401k/TSP distributions appropriately to try and force income into the lowest tax brackets possible during the 10 year window
2. Delaying Roth distributions until the 10th year to take advantage of as much tax free growth as possible
3. Further solidifies the concept of converting some pre-tax money to Roth

Revocable Living Trust Updates

Although your existing estate planning documents may be sufficient, the SECURE Act has put many families in a situation where trust documents may need to be amended or restated. It was very common for trusts to be drafted in a way that allowed the trustee to stretch retirement account distributions over the beneficiary’s lifetime. The pressing concern due to the SECURE Act change is that the new rule actually removes the lifetime stretch option for most beneficiaries and requires proceeds to come out of the inherited account by the 10th year. In current form, a trust drafted in 2019 or earlier could be a ticking tax bomb for beneficiaries that would essentially mandate all income be realized by year 10! 
 
Certain accumulation trust agreements were established to provide the trustee with flexibility to distribute the RMD, rather than to a beneficiary directly.  This may still be a viable strategy for clients that need to protect assets for a beneficiary; however, the compressed window for distributions will incur tax at the highest rate.  Trust tax rates reach the highest marginal tax bracket, 37%, at only $12,750 of income.

Mason Take:

We are currently in conversations with our trusted estate planning attorneys and developing a game plan for efficiently updating your legal documents. We encourage that these legal documents be reviewed periodically as well as any time that substantial legislation is passed. 

“Tax Extenders” – Itemized Medical Deductions, Energy Credits, Mortgage Insurance Premiums

In addition to the SECURE ACT, the recent legislation included a retroactive renewal of over two dozen tax breaks known as tax extenders.  These breaks were either expiring or were temporary for quite some time and were set to permanently expire in 2018. The legislation renewed the extenders and made them retroactive for tax year 2018. 

Mason Take:

The tax extenders most applicable to our clients are:
 
1. Lowering of the hurdle rate for itemized medical deductions from 10% to 7.5%
2. Energy Credits
3. Deductibility of mortgage insurance premiums (PMI) as an itemized deduction
 
The new normal seems to be that major legislation will continue to be passed in the dark of night and at the end of the year.  Changes such as the SECURE Act and the elimination of Social Security claiming strategies affect every taxpayer. Our job is to stay on top of these changes by helping our clients adapt appropriately, and proactively develop and adjust the financial plan. 
 
If you would like to discuss these changes or would like to speak with our advisors about your situation, please reach out.
 
Happy planning in 2020!