Congress passed the SECURE Act and it's time to review several areas of the financial plan, including retirement, income tax, estate planning, and insurance.
SECURE Act will increase age requirement for RMDs
Should the President sign the SECURE Act into law, there are numerous changes that may impact retirement account planning in 2020. The age requirement for required minimum distributions (RMD) will increase to age 72 beginning in 2020. While this presents an opportunity for retirement accounts to grow for an extra 1-2 years, it might also mean additional income and tax planning. For those turning 70 ½ in 2019, the current rules will continue to apply meaning an RMD for this year and each year going forward.
IRA limitations removed and changes for small business plans
Prior to the SECURE Act, contributions weren't allowed once an IRA owner reached age 70 ½. That age limitation is going away meaning anyone earning money can benefit from a tax reduction. This also applies to spousal IRAs and non-deductible IRA contributions that can subsequently be converted to Roth IRAs. Keep in mind that RMDs will still apply to those 72 and older even if they're still working. For small business owners, the legislation introduces tax incentives for setting up a retirement plan or using automatic enrollment in existing plans. There will also be safe harbor for employers to add lifetime income options within their plans.
Overhaul of the “Stretch IRA”
Non-spouse beneficiaries used to be able to strech payments from inherited IRAs over their lifetime. That withdrawal period will now change to 10 years, with certain exceptions including children under the age of majority. In many cases, the shortening of the distribution period will result in larger distributions, meaning possible income tax ramifications for those inheriting the money. Those that planned for a stretch IRA in their estate planning may also need to revisit that language.
Roth accounts may gain in importance
Those that will benefit from the increased RMD age are likely to experience additional growth from contributions and capital gains. In turn, this will increase future Required Minimum Distributions and income tax liability. One strategy might be to convert assets to a Roth IRA strategically in an effort to reduce both RMDs and taxes. Converting IRA money to Roth will also help pass tax-advantaged money to beneficiaries.
Year-end tax planning considerations
Time is running out to strategize for the 2019 tax year. Maximizing pre-tax retirement plan contributions would be the first consideration. Reviewing non-retirement portfolios for capital gains and possible capital loss opportunities is of the utmost importance. Taxpayers need to be mindful of certain thresholds that will affect capital gains tax rates, NIIT (Net Investment Income Tax), and Medicare surcharges. Income projections can also help determine what opportunities, if any, might exist for Roth conversions.