The SECURE Act: Tax Planning for 2020

With holiday and end-of-year celebrations you might have missed the tax news out of Washington in late December. President Donald Trump signed the SECURE Act that made changes to how we save money for retirement and how we use money in retirement, mostly starting in 2020.

SECURE stands for “Setting Every Community Up for Retirement Enhancement” and includes changes that can affect all taxpayers, young and old. 

“The SECURE Act is a nice thing — anything we can do on a bipartisan basis in this day and age is something of value — but my sense is the changes in the act are really quite modest,” said Alicia Munnell, director of the Center for Retirement Research at Boston College, and a columnist for MarketWatch.

And some of the changes may not be good news for retirees, tax experts say. 

So while you may be knee-deep in filing 2019 taxes, take some time to learn about SECURE so you can talk to your financial advisor and make adjustments where possible.

Let’s take a look at 3 changes of particular interest to older adults:

1. RMDs Start at Age 72

Before the SECURE Act, you generally had to start taking required minimum distributions (RMDs) from your traditional IRA or qualified retirement plan in the tax year you turned age 70 1/2.

Now you can wait until the tax year you turn 72. This change applies to RMDs after Dec. 31, 2019, if your turn 70 ½ after Dec. 31, 2019.

Around the age of 70 and confused? To avoid 50% penalty for missed RMDS, Jamie Hopkins, director of retirement research at Carson Wealth, spells it out:

• If you were born before July 1, 1948, you were already taking RMDs, and that continues unchanged going forward.
• If you were born on July 1, 1948, through June 30, 1949, you turned 70.5 in 2019. Your first RMD is due by April 1, 2020. Your second one is due by Dec. 31, 2020. And then you continue to take RMDs by the end of each year going forward.
• If you were born on July 1, 1949, or later, your first RMD is due by April 1 of the year after which you turn 72. Your second would be due by Dec. 31 of that same year, and then by Dec. 31 of each year thereafter.

2. RMDs on Inherited Accounts

Under the old rules for inherited retirement accounts such as an IRA or defined contribution plan, you could “stretch” out the account and take RMDs each year over your life expectancy. Now all those distributions must be taken by the end of the 10th calendar year following the year of death, and there is no longer a requirement to take out a certain amount each year.

There are some exceptions to this change: Surviving spouses, children under the age of majority, and disabled and chronically ill individuals can continue to take advantage of the stretch provision.

This change applies to distributions for plan owners who die after Dec. 31, 2019.

What does this mean for children and grandchildren beneficiaries?

“Because the withdrawals will be larger, they will likely force beneficiaries to pay higher tax rates on taxable distributions, and because the time period is limited, the opportunity for tax-deferred growth is also being shortened. Realistically, the government expects $15.7 billion more in tax revenue over the next 10 years due to this change. The bottom line: Heirs will receive less true wealth from IRAs and 401(k)s than they could under previous rules,” explains Jamie Hopkins.

3. No Age Limit on Traditional IRA Contributions

Under the prior law you could not contribute funds to a traditional IRA if you were age 70 ½ or older. Now you can make a traditional IRA contribution at any age as long as you still have earned income

In 2020, the contribution limit for an IRA is $6,000, or $7,000 if you are 50 or older. If you and your spouse are 71 or older in 2020 and still working, you can contribute up to $7,000 to an IRA in each of your names, or $14,000 total.

“This gives you a valuable tax deduction and helps you save more for retirement,” says Tony Drake, a certified financial planner and founder of Drake & Associates in Waukesha, Wisconsin.

In the past, Molly Kavanaugh frequently wrote about Kendal at Oberlin for the Cleveland Plain Dealer, where she was a reporter for 16 years. Now we are happy to have her writing for the Kendal at Oberlin Community.