Roughly two years after the wide sweeping Tax Cuts and Jobs Act comes yet another round of substantial reform! The goal of this article is to add more quick-hit details geared towards our more affluent clientele than the average SECURE Act article you may read in the paper. There will be additional articles where I will expand into practical applications of the SECURE Act. Please know that we will be proactively discussing these changes during client reviews in customized ways if you are affected because the impact of this act will vary greatly from person to person.

First of all, the overarching theme of the SECURE Act is trying to address the retirement crisis in America. The act tries to address this massive problem by increasing optionality of how people can save for retirement, incentivizing employers to offer plans, and introducing some broad tax extenders. But in order to compensate for those positives, there are some fairly large tradeoffs as well.

Summary of Key Changes

  • IRA Changes
    • You can now contribute to an IRA beyond 70.5 (Yes, ANY age)
      • Earned income rules apply still
      • Both deductible and non-deductible contributions are allowed
      • Spousal provisions are allowed
    • Elimination of the lifetime stretch provision
      • There are a list of “eligible designated beneficiaries” that are excluded
        • Spouse, disabled, chronically ill, 10 year younger rule, direct children until age of majority (varies from state to state)
      • For non-eligible beneficiaries the rule is replaced with a “10 Year Rule”
        • There is flexibility within the 10 years on how much you take in any given year which allows for some creative tax planning!
        • The “10 Year Rule” has some potentially drastic estate planning implications if a Trust is the beneficiary of a tax deferred retirement account
        • Potentially increases benefits of Roth conversions and tax equivalent value of non-qualified money in retirement
      • Required Minimum Distributions (RMDs) don’t start until age 72
        • If a person turned 70.5 any-time before 2020, then that person must continue on like the old rules
        • This does NOT change Qualified Charitable Distribution (QCD) eligibility at age 70.5
          • This creates a unique tax break opportunity for a married couple who are of age and are already charitably inclined when combined with the new ability to contribute to IRAs past age 70.5
        • The same rules with the April extension of first year RMDs apply
          • This would still lead to that next year being a “double RMD” year and is typically advised against
        • Your Schwab profile may still show an RMD if you happen to be turning 70.5 this year, as Schwab has not updated that part of their system yet
      • A $5,000 qualified birth or adoption distribution is now available
      • A $100,000 qualified disaster distribution with several caveats is in the act as well
        • Has to have occurred Jan 1st 2018 or later
        • Must be a federally declared disaster area
        • Avoids early penalty as well as some preferential tax treatment with ability to spread income over multiple years
  • 401(k) & Other Employer Plan Changes
    • Many provisions that will make annuity options more prevalent
    • Much larger tax credits for small businesses that establish a plan
      • Applies to less than 100 employee businesses
      • Credit is for 3 years, and could be up to $5,000
        • Formula is $250 x non-HCE employees up to $5,000. Minimum of $500.
      • Additional tax credits for adopting auto enrollment
    • Plan Adoption Extension
      • Employers can now do some hindsight planning by waiting until tax deadline instead of having to elect before the end of the year
      • Includes profit sharing and other potentially
  • Miscellaneous
    • 529 Changes
      • $10,000 payment towards student loans allowed from 529
        • Creates a potential planning opportunity depending on the state where the recent graduate sets up their own 529 plan and gets additional benefits from a tax and interest standpoint
      • A list of apprenticeships are now eligible beyond normal qualified education
    • Kiddie Tax
      • Unearned income from children reverts back to pre TCJA and is now at parents marginal tax rate
        • For a brief period this had been moved to trust tax rates
        • Potential ability to choose this option of taxation for 2019
      • AGI Medical Hurdle
        • The “hurdle rate” for now remains at 7.5% for medical expenses instead of climbing to 10%

As you can see there are quite a few changes, and the impacts will vary widely from household to household. We are proactively combing through financial plans of our clients, but if you have any specific questions please contact our team!