The SECURE Act: What Individuals Need to Know

This blog was co-written by Mitchell Guralski.

One of the most influential retirement savings laws in nearly 15 years — the Setting up Every Community for Retirement Enhancement (SECURE) Act — will cause widespread changes for people.

The act was signed into law on December 20, 2019 and most of the changes went into effect on January 1, 2020.

So how does the SECURE Act impact you? We have gathered a few important changes to be on the lookout for.

1. Removal of age cap on IRA contributions

Old rules denied traditional IRA contributions once an individual turned age 70.5.  Now, anyone with earned income will be able to contribute to traditional and/or Roth IRAs, regardless of their age. The annual contribution limits still apply.

2. Required minimum distributions (RMDs) do not begin until age 72

The RMD age has been moved from age 70.5 to age 72. You will now be required to take your first RMD by April 1 of the year following the year you turn age 72. This rule applies only for those turning 70.5 after 12/31/2019.

Qualified charitable distributions (QCDs) will still be allowed once an individual has reached age 70.5 but are offset by deductible IRA contributions made after age 70.5. For example, if an individual were to make $15,000 in deductible IRA contributions after age 70.5, then later made a QCD of $25,000, only $10,000 ($25,000 – $15,000 = $10,000) would be eligible to be claimed as a QCD. You would be eligible to claim the remaining $15,000 as an itemized deduction.

With these changes, make sure you are considering Roth Conversions in your plan. If your RMD amount will force you into a higher tax bracket in future years, it may make sense for you to “fill up” your lower bracket by converting pre-tax retirement dollars to Roth, before reaching RMD age.

3. Removal of the “stretch” provision

Beneficiaries will no longer be able to “stretch” distributions from inherited retirement accounts, with some exceptions. Qualified retirement accounts (IRAs, 401(k), etc.) in which the owner passes away on or after 1/1/2020, must now be completely liquidated by the end of the 10th year. The beneficiary is not subject to RMDs, leaving them the ability to choose when they take distributions, as long as the account is emptied by the end of the 10th year.

Due to these changes, now is the ideal time to review the beneficiaries of your retirement accounts. Certain beneficiaries will qualify as exceptions to the new rule, while others have been adversely affected.

The following beneficiaries can still stretch their distributions

  • Spouses
  • Minor children until they reach the age of majority, then the 10-year will apply
  • Those who are disabled or chronically ill
  • Any beneficiary not more than 10 years younger than deceased

Also, listing a trust as beneficiary may now cause more harm than good. Some trusts limit withdrawals to the RMD only, and since there is no RMD for the beneficiary, the account would be forced to payout only in year 10. This could cause a potentially large taxable event in that year. If you have listed a trust as a beneficiary, make sure to review this with your attorney.

4. Penalty-free withdrawal for birth or adoption

You can now make a $5,000 penalty-free withdrawal from your qualified retirement account for birth or adoption expenses. This withdrawal must be made within one year from date of birth or adoption, but not before the birth or adoption has occurred.

This $5,000 distribution is per parent, per child. Meaning if both parents have available retirement funds, they could take up to $10,000 total per birth or adoption.

If a parent does take a distribution, they are later able to “repay” themselves by contributing funds back into the account the distribution was taken from. The “repayment” contribution will be allowed to push the parent above the standard IRS contribution limits for the year. The timing of when the “repayment” needs to be completed by is still uncertain.

5. Expansion of qualified 529 expenses

The SECURE Act has created two notable additions to the list of qualified 529 expenses.

The first is the introduction of “qualified education loan repayments.” These tax-free distributions can be used to pay principal and interest for the beneficiary’s qualified educational loans and have a lifetime maximum of $10,000 per-person. In addition to paying the debt of the 529 plan beneficiary, an additional $10,000 can be distributed tax-free for each of the beneficiary’s siblings. While these distributions would be tax-free, it is important to note that this benefit would disallow any student loan interest deduction to the extent the interest is paid from a tax-free 529 distribution.

The second addition to the qualified expenses list is the cost for Apprenticeship Programs. If the program is properly registered and certified, you will be able to make tax-free 529 distributions to pay for related expenses.

6. Changes to “kiddie tax”

The so-called “kiddie tax” applies to individuals that may be able to be claimed as a dependent by his or her parents, and who have unearned income of $2,200 or more. Along with some other conditions, if the child is under 18 — or under age 24 if they are a full-time student — this will apply. Typically, this income will come from dividends or capital gains generated in a custodial account, such as an UTMA or UGMA.

The Tax Cuts and Jobs Act (TCJA) of 2017 changed the rules regarding the “kiddie tax” so this unearned income would be taxed at trust and estate rates. These tax brackets are much more compressed than the individual tax brackets, meaning the unearned income could quickly be taxed at higher rates.

The SECURE Act has changed this back to the laws prior to the TCJA. Beginning with the 2018 tax year, the “kiddie tax” will be enforced at the parent’s tax rates rather than the trust & estate rates. Individuals will have the ability to amend their 2018 return for this change, but the child would have had to have a large amount of unearned income to make this a cost-effective choice.

7. Extension of the medical expenses 7.5% AGI-floor

In order to include medical expenses in your itemized deductions, they must be greater than 7.5% of your AGI. For example, if your AGI was $100,000, your AGI-floor would be $7,500 ($100,000 * 7.5% = $7,500). Assuming you had $20,000 of qualified medical expenses, only $12,500 would be included in your itemized deductions ($20,000 – $7,500 = $12,500).

Before the passage of the SECURE Act, this AGI-floor was set to change to 10% for 2019. However, the law has extended the 7.5% floor to last for the 2019 and 2020 tax years. If no new law is passed before then, it will increase back to 10% for the 2021 tax year.

Navigating the change

The SECURE Act includes more provisions than those outlined above, including changes for businesses.

If you have any questions or would like additional information, please reach out to a Wipfli Financial Advisor.

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Jake Harmsen

Senior Financial Advisor

Jake has built his career in accounting and personal finance. As a senior financial advisor with Wipfli Financial, as well as a certified public accountant (CPA)*, Jake has the experience to look at all aspects of his clients’ financial lives.

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The SECURE Act: What Individuals Need to Know

time to read: 4 min