How The Secure Act Changes Retirement Planning

Last year we experienced the most legislation impacting retirement planning since 2006. If you are approaching retirement, you need to know how the SECURE Act changes retirement planning. The COVID-19 pandemic resulted in congress passing the CARES Act, SECURE Act, and the Consolidated Appropriations Act.

The SECURE Act (along with a series of tax-extenders) was signed into law at the end of 2020. Along with it comes sweeping changes that will affect retirement plans for years to come. Changes to retirement plans such as IRAs and 401ks may be substantial to many taxpayers. Especially those with large tax-favored retirement balances.

What follows is an explanation of what retirees need to know and what retirement planning steps you should take next.

IRA Account Changes Impacting Retirement Plans

The New Required Minimum Distribution Age Is 72

If you owned an IRA (or 401k and stopped working) before 2020, you had to take Required Minimum Distributions (RMDs) starting at age 70 ½.

Individual retirement accounts (IRAs) allow taxpayers to defer tax on their contributions and growth until distribution. RMDs are in place to make sure account holders use their funds for retirement needs.

Your first RMD amount starts at around 3.6% of your ending retirement balance on 12/31 of the previous year. Then it increases more and more each year you get older since it is based on life expectancy.

By the time you are 90 years old, the RMD percentage climbs to roughly 9%. Why does this matter? These distributions increase your income tax liability.

The Change:  The age when RMDs must begin has increased from 70 ½ to 72. This allows taxpayers to push their RMDs and tax liability a little further down the road. It can also provide more retirement tax planning opportunities for retirees.

Uniform Life Expectancy or RMD Table for 2021 and 2022
2021 and 2022 RMD Table

The Stretch IRA Isn’t So Stretchy Anymore

Stretch IRA rules apply to the beneficiaries of retirement accounts. For most retirees, this would most likely be your children or other family members.

The non-spouse beneficiary is responsible to begin RMDs once they inherit the IRA. If the beneficiaries are younger (which is usually the case), the RMD amount is lower since it’s based on life expectancy.

A lower RMD amount allows the principal in the account to continue to grow over a longer time frame. Thus, the beneficiary can “stretch” out the life of the inherited IRA account.

The Stretch IRA has always been a great wealth transfer tool. For inherited Traditional IRAs, it allowed the beneficiary to spread the tax liability over many years. For inherited Roth IRAs, it allowed the beneficiary to preserve their tax-free account. 

The example below shows how the 10-year rule would impact an inherited IRA in the amount of $500,000. It’s easy to see how the accelerated taxation of the retirement account limits the long-term growth of the account. 

Balance of a Stretch IRA vs. the 10-year rule over time
Impact of the 10-year Rule on a $500,000 Inherited IRA

The Change:  Inherited IRAs must be completely distributed within 10 years after the death of the original account holder. The law is effective for IRA accountholders who passed away in 2020. Beneficiaries who are not subject to the rule are:

  • Spouses
  • Individuals who are 10 years younger than the deceased IRA accountholder
  • Disabled or chronically ill beneficiaries

No Age Limit on Traditional IRA Contributions

Traditional IRAs were the only retirement account with an age limit for contributions before 2020. So if you or your spouse were still working past age 70 ½, you wouldn’t be able to make a Traditional IRA contribution.

Now the only limitation is whether you or your spouse have any “earned income.” The IRS generally defines earned income as income from wages or self-employment.

The Change:  Individuals of any age are able to contribute to Traditional IRAs. At least one spouse in a married household must have earned income. The contribution amounts cannot exceed the total earned income. This provision provides retirement benefits for people working in their later years 

Qualified Charitable Distributions From Your IRA

We’ve talked a lot about RMDs, but what if you don’t have any income needs? In that scenario, your RMD may push you into higher income tax brackets. This could trigger phaseouts of other tax deductions that could be beneficial to you.

Well if you are philanthropically inclined, the IRS will allow you to gift your RMD to charities. The annual limit is $100,000 per person and the RMD can go to one or more charities of the donor’s choice.

So a married couple can gift up to $200,000 of their RMDs every year. To be considered a Qualified Charitable Distribution, the money must never pass through the hands of the IRA owner. Contact your custodian to notify them of your intent to process a QCD.

The Change:  We mentioned earlier that the new RMD age increased from 70 ½ to 72. Well the age to make a QCD remained at 70 ½. So even if your RMDs have not started, you can begin gifting up to $100,000 per person to charities every year. This is a great retirement planning strategy for IRA owners with limited to no income needs.

401K and Other Employer Plan Changes

Part-Time Workers Gain More Access to Employer Plans

In previous years, employers could generally exclude part-time employees from 401k  and other defined contribution plans. Most plans require that an employee works at least 1,000 hours of service in a plan year to be eligible.

This rule is disadvantageous in two ways to long-term part-time employees. First, they lose out on the tax benefits of contributing to 401Ks and Roth 401Ks. However, these employees also miss out on receiving employer-matching contributions.

The Change:  A part-time employee will become an eligible participant once they have 500 hours of service for three consecutive years. While the 1,000-hour rule is still in effect, employees can now become eligible by meeting either rule.

More Access to Annuities in 401Ks and Other Employer Plans

Annuitization is a process of forfeiting a lump sum of money in exchange for a guaranteed retirement income stream. The income stream can be a term such as 10 years or for the lifetime of the recipient

If your employer provides a pension plan, that in itself is an annuity. Large insurance companies issue annuity products and promise to make the stream of payments. So it stands to reason that your annuity income is only as secure as the financial solvency of the insurer.

If an insurer is not able to meet its financial obligations, this would present a liability to the employer. It’s the employer’s responsibility to provide safe and reliable investment options in the plan. For this reason, annuities have not been widely used in retirement plans.

The Change:  The SECURE Act has eased regulatory requirements. A plan fiduciary now must only meet a few requirements when offering annuities in their plan. By doing so, the employer receives a tremendous amount of liability protection. This should encourage employers to provide more employees with lifetime income options.

No 401k Yet? Your Employer May Adopt One Soon

A big reason why many small to mid-sized businesses don’t offer a retirement plan is because of the costs. Employer retirement plans fall under the jurisdiction of ERISA law, which is very complex.

To ensure the plan is in good standing, the employer must hire a third-party administrator. The cost can be expensive depending on how many employees participate.

Another cost to the employer is employee matching contributions. Most employers have to make some sort of contribution for the benefit of all their employees. This is to ensure that lower-income employees are receiving meaningful benefits.

The Change:  The Secure Act provides tax credits to employers who establish new retirement plans. There is an additional tax credit for providing auto enrollment for employees. These tax incentives should encourage more employers to adopt employer retirement plans.

The Deadline To Establish an Employer Plan Is Extended

The deadline to establish most employer-sponsored retirement plans is December 31st. Yet, the deadline to make Traditional and Roth IRA contributions is April 15th of the following year. The 12/31 deadline made year-end retirement planning difficult for business owners. 

The Change:  The SECURE Act amends the deadline for certain types of employer plans. For plans that are entirely employer-funded, the new cutoff is the tax-filing deadline. Including extensions, employers now have until September 15th of the following tax year to establish a plan.

While not all plans are eligible, pension and profit-sharing plans are eligible. This is good news for self-employed individuals who now have more time to reduce taxes from the previous year.

Other Changes That Impact Retirement Planning

Favorable Changes To Kiddie Tax Rules

A primary goal for many retirees is transferring wealth to their grandchildren through lifetime gifts or inheritance. If the inherited assets generate any income, that income is subject to taxation – but how should a minor be taxed?

Historically, the Kiddie Tax rules stated that a portion of a child’s unearned income is subject to the parent’s tax rate. But when the Tax Cuts and Jobs Act (TCJA) was passed, the rules changed from years 2018-2025.

Under the new tax law, the children’s income would be subject to rates that trust and estates pay. These rates kick in at much lower income levels, increasing the child’s tax liability.

The Change: The Kiddie Tax rules will revert to the parent’s tax rate in determining tax liability. Additionally, the change is retroactive for tax years 2018 and 2019. If you were subject to the Kiddie Tax in either of those years, you will want to consider filing an amended income tax return.

Expansion of 529 Plan Qualifying Educational Expenses

Another popular gifting strategy amongst retirees is funding 529 plans for their grandchildren. Money contributed to these college savings accounts is then invested in mutual funds. Distributions from the account for qualifying educational expenses are tax-free.  


Annual Exclusion compared to 529 plan forward gifting
529 Plan Forward Gifting Strategy

Each person can gift $15,000 per year, so a married couple can gift $30,000 combined. Also, accelerated gifting allows a couple to make a single gift of $150,000. One concern many parents have is overfunding these plans. Distributions for non-educational expenses get hit with a 10% penalty and income tax on plan earnings.

The Change:  Qualifying educational expenses have been expanded to include apprenticeship programs and loan payments. The new loan payment provision allows for a one-time $10,000 distribution to pay down qualified education loans. The $10,000 provision can also be used for each of the beneficiary’s siblings. Each sibling can use a one-time payment to pay down their own qualifying education loans up to $10,000.

Tax Extenders In 2020 Impacting Retirement Planning

Many tax provisions were set to expire in 2020. Given the unusual year 2020 was, congress passed a variety of tax extenders. These could provide some added opportunities for retirees when filing their 2020 taxes.

Medical Expense Deductions

Taxpayers that itemize deductions may be familiar with the medical expenses income threshold. In 2020, only medical expenses above 7.5% of your Adjusted Gross Income (AGI) counted towards itemized deductions. The threshold was set to increase to 10% in 2021 but will remain at 7.5% for at least one more year.

Exclusion of Discharge of Principal Mortgage Debt

Under current tax law, debt that is forgiven becomes taxable income to the borrower. An exception has been made for homeowners who lost homes to foreclosures or short sales. They can exclude up to $2 million of canceled mortgage debt from their gross income.

Energy-Efficient Home Improvements

An energy-saving improvement credit is available for up to 10 percent of the cost of the improvement. The credit has been around for 10 years and the limit is $500. Any use of the credit in previous years reduces the $500 credit.

Retirement Planning Actions To Take

Tax Planning 

With the increased RMD age of 72, IRA owners now have a few more years of lower tax rates. That means you get to delay the tax and your portfolio grows tax-deferred for a few more years. You can also take advantage by doing Roth conversions if that makes sense for you.

If you are making charitable gifts, the QCD age remaining at 70 ½ is great news. Making gifts from an IRA will be better than gifting cash or appreciated stock. That’s because distributions from your IRA are income taxable. But realized gains in a taxable account are subject to lower capital gain tax rates.

If you or your spouse are still working in retirement, the changes to retirement plans are good news. If you are working full-time and your employer doesn’t offer a 401k, they may soon. But if they don’t, you can now contribute to a Traditional IRA no matter your age.

Most part-time workers aren’t currently eligible to contribute to their employer’s retirement plan. Now if they work at least 500 hours in 3 consecutive years, they must become eligible. The law goes into effect in 2021, which means that part-time employees can become eligible in 2024. In the interim, a Traditional or Roth IRA could make sense depending on your tax situation.

Lastly, self-employed individuals that had no retirement plan have a great opportunity. The deadline to establish an employer plan has been extended to the tax filing deadline. That means business owners have until 04/15/2021 (09/15/2021 if filing an extension) to establish and fund a plan.

The defined contribution plan limit in 2020 was $57,000. So self-employed individuals can significantly reduce their 2020 income. Besides the tax savings from contributing to the plan, they can also receive a tax credit!

What To Do Next

With all the retirement plan changes, it’s time to revisit your retirement income plan. As I mentioned earlier, the changes can impact your contributions and distributions. This has a direct impact on the tax that you pay.

Business owners with no employer retirement plan should talk to their financial planner. It’s a good idea to postpone filing your 2020 tax returns until you do so. Your financial planner will be able to help you select the right employer plan for your needs. This can save business owners thousands in tax dollars.

If you have been making charitable gifts, this is also a good time to revisit your gifting strategy. Charitable gifting can be a big part of your tax plan. And your tax plan goes hand in hand with your retirement income strategy. You never want to make a financial decision without knowing how it impacts the big picture.

Wealth Transfer

The new changes to Stretch IRA rules will impact IRAs where a trust is named as beneficiary. Before the SECURE Act, many affluent IRA owners would name a “see-through trust” as the primary beneficiary. These types of trusts allowed RMDs to “stretch” over the beneficiary’s life. It also provided the beneficiary asset protection from creditors.

These trusts no longer work as intended with the new 10-year rule for inherited IRAs. They are often drafted in a manner that instructs the withdrawal of RMDs from the trust.

But with the new 10-year rule, there is no RMD until the 10th year. Beneficiaries are free to take however much they want in any other year. This could result in the distribution of the entire IRA balance in the 10th year. With a Traditional IRA, that would result in the entire balance being taxable in one year. That’s one tax bill we hope we never have to see!

Discretionary trusts, which let assets accumulate within the trust, will have their own set of challenges. Income in the form of RMDs can remain inside of the trust but are subject to trust tax rates. These rates reach the highest 37% marginal tax rate at $12,750 of taxable income.

What To Do Next

If you currently have a revocable trust in place, this is an ideal time to have it reviewed. If you don’t have a formal estate plan in place, consult with your financial planner to determine if you need one.

Whether you have a formal estate plan or not, you should review your IRA beneficiary titling. While you’re at it, take time to review the beneficiary titling on all your other assets. Review the beneficiaries on your bank accounts, investment accounts, and retirement accounts. Don’t forget deeds to real estate properties you own.

These recent legislative changes may shift your

estate planning strategies. As an example, it may not make sense to split assets equally amongst beneficiaries. Specifying certain assets to transfer to each beneficiary could make more sense. For example, it may make sense for a beneficiary in a lower tax bracket to inherit a Traditional IRA. 

Final Thoughts on Retirement Planning Decisions

Retirement Planning has never been as complex as it is today. There are a larger amount of retirement plan types to choose from today. One common obstacle facing most retirees is understanding all the rules and laws that govern these plans.

Another challenge is determining which plan is best for your needs. If your income fluctuates, you may want to alternate your contributions each year. It may make sense to make pre-tax contributions one year and Roth contributions in another.

At the end of the day, a good retirement plan involves running some future projections. Step one is to understand your current financial picture and how it will change in future years. Only then can you begin to analyze the big picture and make better financial decisions.

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