On December 20, The President signed two spending bills. Included in those bills was the SECURE Act. The changes from the SECURE Act have not received much attention so I will shed some light on the more pertinent ones. Let’s jump right into it.
For taxpayers who have qualified retirement accounts (401ks, Traditional IRAs, etc.), the age at which Required Minimum Distributions (RMDs) must be taken has been pushed out from the year the taxpayer turns 70 ½ to the year the taxpayer turns 72. This sounds convoluted so let’s simplify it. The government allows taxpayers to accumulate funds inside these retirement accounts and for those funds to grow tax-free each year. However, those funds will be taxed in the year distributed. So, some taxpayers choose to wait and wait and wait if they don’t need the cash which allows the funds to continue to grow. Well, congress knows this so they added the RMD rules to make sure Uncle Sam would get his bite out of the funds that have had in some cases 50+ years of tax deferred growth. This new law allows taxpayers to delay taking distributions for an additional 1 ½ years, which allows those accounts additional time to grow without taking a tax hit. It takes effect for taxpayers who turn 70 ½ in 2020 or later.
The next piece of the legislation I want to mention also involves qualified retirement accounts. Typically, if funds are withdrawn from these accounts prematurely (before reaching age 59 ½ - remember the government wants to see these funds used for retirement) there is a 10% penalty on the amount distributed in addition to income tax generated. The new law exempts distributions up to $5,000 from the 10% penalty if the taxpayer gave birth within the past year or finalized a child’s adoption. Remember, income tax will still be due on the distribution, but the taxpayer can avoid the penalty ($500 if $5,000 is the amount distributed).
The biggest change affecting taxpayers are the changes made to the “stretch” retirement accounts. What is a “stretch” retirement account? These are qualified retirement plans, again as mentioned above, that are inherited by heirs of the deceased taxpayer. Under the old law the heirs could then take distributions over their life expectancy, which could be 50+ years. This means that Uncle Sam also gets its tax revenue from the account over 50+ years. Congress wants taxpayers to pay the tax much sooner. The new law stipulates that inherited retirement accounts must now be withdrawn over a maximum 10-year period. Of course, this means Uncle Sam gets his bite over the 10-year period versus the 50+ year period. However, the “stretch” provision is still available to surviving spouses, minor children (not grandchildren), and disabled individuals.
There are other tax provisions in the new law, but these discussed above will impact the biggest group of taxpayers. If you would like more details about what else is in the law, message me. As always, if there is a tax subject you are curious about send me a note and I will try to use for my next blog.