Understanding the New SECURE Law

By Mo Vidwans

We can always leave it to Congress to come up with innovative (or should I say strange) names for the new laws that it passes. The SECURE law was passed in December 2019 and we are using it already to pay taxes and other things. SECURE stands for Setting Every Community Up for Retirement Enhancement. This is part of the 2019 Omnibus Spending Bill.

Name is not as important as the content in the law and there is plenty in the new law that we all should be aware of primarily because it is already affecting us now and will do so even more later on. So let's get into it. The SECURE act makes the most dramatic changes to the retirement account laws, such as IRAs or 401Ks, and became effective the first of this year. There are two distinct parts to this law:

Part I is during the account owner's life time and Part II is after account owner's death

Part I

Implications of the act during the account owner's lifetime: RMDs now begin at age 72 and not at 70.5 but the owners may still make Qualified Charitable Distributions (QCD) as they can now at age 70.5. There used to be penalty if the money is withdrawn from the IRA for childbirth and adoption purposes but no more; you can withdraw up to $5,000 penalty-free but still have to pay taxes. This seems to be available per child basis and not only for one-time use.

The age limit to contribute to a Traditional IRA is removed now. In the past those who keep working past their age of 70.5 could not contribute to their own IRA; now they can. Employer retirement plans have more flexible annuity rules which will allow greater flexibility for ownership of annuities in such plans. These new waters need to be treaded carefully; as having annuity in a 401K must be considered with some caution and much planning.

Small businesses are given tax credits to incentivize employer retirement plans; this is a good move. Small businesses have difficulty creating such plans to be competitive and to attract talent. Long-term part-time employees now get greater access to 401K like plans.

There are some good changes to 529 plans. Apprenticeship is added as qualified expense in the list of qualified education and that includes fees, books, supplies, required equipment so long as the program is registered with and certified by the Dept. of labor. This change is retroactive to 2019. Even more, student loans are also added as qualified education expenses for 529 plans so monies from 529 plans can be used to pay the principal and/or interest of a qualified education loan to a maximum lifetime limit of $10,000. If interest of a student loan is paid this way then that interest cannot be claimed as deduction in your taxes (above the line deduction on 1040).

Kiddie-tax rules are reverted back to what it was prior to December 2017 changes in the tax laws (TCJA). Prior to 2017 changes, any income subject to the Kiddie-tax was taxable at the child's parents' marginal income tax rate. The 2017 (TCJA) law changed that to tax Kiddie income at the Trust income tax rates. This had resulted in higher taxes for children with higher income. Now it is reverted back to what it was and the children are given the option of using either of the laws for the years 2018/2019.

Part II

The SECURE act makes drastic changes to the rules for the beneficiaries of the retirement plans. The rules before and after are quite technical and some understanding is necessary.

The most affected area has been the “designated beneficiaries" rule when children or grandchildren are the designated beneficiaries. Before, the beneficiary had the choice of taking the distribution as inherited IRA with required minimum distribution based on his or her age - known as stretched IRA because the benefit of that IRA can be stretched over the estimated life span of the beneficiary. However this is no longer the case.

The SECURE act totally overhauls the rules for the new owners of such inherited IRAs. Effective January 1, 2020, there are no RMDs allowed for inherited IRAs and inherited qualified plans. Instead such inherited plans must be 100 percent distributed within 10 years of the new owner taking charge of the inherited account (there are exceptions if the owner is a minor, disabled or chronically ill). It is critical to understand this change because it will affect our strategy as to how we wish to pass on our unexhausted retirement accounts and how the recipients plan to use the money. No RMDs allowed, as mentioned above, means that the inheritor of the account cannot stretch the account over his/her lifetime but must exhaust the account in 10 years or less. If the account is sizeable then it is a tall order and they could be paying much extra taxes. So are there any immediate solutions?

Converting to ROTH is always a good consideration. Granted the owner has to pay all the taxes now but it certainly takes away the burden from the inheritor's shoulders of cashing every thing within 10 years. Well, they still have to cash out but there are no tax implications for them.

Blending spousal and children's inheritance which would allow the IRA to be split between the spouse and the children first and then children will inherit the spousal IRA later thus stretching out the 10 year limit.

We have mentioned and discussed the charitable contributions via the QCD route where the end result is that the funds go to charity rather than to the family. Thus this approach may be beneficial to just some owners but not all.

Mo Vidwans is an independent, board certified financial planner. For details visit www.vidwansfinancial.com, call 984-888-0355 or write to mpvidwans@yahoo.com.