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The SECURE Act: What You Need to Know

J Terwilliger 2014
James P. Terwilliger, PhD, CFP®
Retired 2/2022, Senior Vice President, Senior Planning Advisor
[email protected]
(585) 419-0670 x50630

Last December, the SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019 became a reality. This far-reaching legislation effects everyone who has a 401(k)-or-similar employer retirement plan or IRA.

Let’s look at just a few of the law’s 29 provisions that likely have the biggest impact on CNB Wealth Management clients. The intent is to give you a high-level overview and indicate whether you are covered by the “old” or the “new” rules.

Later Start Date for Required Minimum Distributions (RMDs). For traditional IRAs and employer retirement plans subject to RMDs, the SECURE Act changes the initiation age to 72 for RMDs. Under the prior legislation, the threshold was the year in which you turn age 70 ½.

If you turned age 70 ½ in 2019 or earlier, you are covered by the “old” rules. Your RMDs will continue as normal. If you turn age 70 ½ in 2020 or later, you are covered by the “new” rules. Your RMD initiation year will 2021 for those turning 70 ½ in the first half of 2020 and 2022 for those turning 70 ½ in the second half of 2020.

The Required Beginning Date (RBD) is still April 1 of the year following the RMD initiation year. As before, those who wait until the following year will need to take two RMDs that year.

No More “Stretch” IRAs for Most Beneficiaries. The SECURE Act eliminates “stretch” IRAs for most beneficiaries and mandates that inherited Traditional and Roth IRAs be distributed within 10 years following the year of the IRA owner’s death.

Exceptions are spouses, minor children, those who are chronically ill or have disabilities, and those within 10 years of the deceased IRA owner's age. Other than minor children who must follow the 10-year mandate once reaching the age of majority, the remaining exceptions can still take advantage of the stretch feature. For beneficiaries who are not exceptions:

If the IRA owner passed in 2019 or earlier, as a non-spouse beneficiary, you are covered by the “old” rules. While you must take RMDs, you can continue to stretch inherited Traditional and Roth IRAs over your life expectancy.

If the IRA owner passes in 2020 or later, the “new” rules are in place. Unless you are an exempt beneficiary, RMDs are no longer required but your inherited IRA must be distributed fully within 10 calendar years following the year of the IRA owner’s death.

Oddly enough, the effective date is extended for two years (for deaths after 12/31/2021) for beneficiaries of 403(b), 457(b) and other government retirement plans.

Age 70 ½ Ceiling for Traditional IRA Contributions Eliminated. Starting in 2020, you now can contribute to a Traditional IRA after age 70 ½ if you are still working. While this provision may appear to be attractive, we generally advise clients at this stage in their lives to direct excess cash flow to a Roth IRA and/or taxable investment account instead.

Paying Student Loans from 529 Plans. The SECURE Act allows up to $10,000 (lifetime for a beneficiary) for student loan payments using 529 Plan distributions. Such distributions are considered qualified by the IRS, meaning they are tax and penalty-free at a federal level. The spoiler here is New York State, which recently deemed such distributions as non-qualified for state income tax purposes. These distributions will trigger a recapture of related NYS tax deductions and a state income tax on the earnings portion of these distributions.

Kiddie Tax. Welcomed by parents and grandparents, the SECURE Act reversed the harsh taxation of unearned income enacted as part of the Tax Cuts and Jobs Act of 2017 that taxed interest, dividend, and capital gains income for dependent minors at high fiduciary rates. The new law restored these tax rates to the parents’ marginal rate and made the change retroactive to the 2018 tax year.

Qualified Charitable Distributions (QCDs) from Traditional IRAs. QCDs can still be made starting at age 70 ½. Even though there is now an age gap when QCDs are allowed but distributions are not required, QCDs are still considered the most tax-efficient method for making charitable gifts. QCDs continue to be allowed from Inherited IRAs within the new 10-year timeframe.

Still have questions? Contact your CNB Wealth Advisor to learn how the SECURE Act may impact your financial plan.

This material is provided for general information purposes only. Investments and insurance products are not FDIC insured, not bank deposits, not obligations of, or guaranteed by Canandaigua National Bank & Trust or any of its affiliates. Investments are subject to investment risks, including possible loss of principal amount invested. Past performance is not indicative of future investment results. Before making any investment decision, please consult your legal, tax or financial advisor. Investments and services may be offered through affiliate companies.