Dear clients and friends,

Now that the SECURE Act has been passed into law, we felt it important to revisit the key provisions of the new legislation. We shared some initial thoughts in our August newsletter, so some of this may be familiar.

Changes impacting businesses

There are some new tax credits and incentives for small businesses to offer retirement plans to their employees and encourage them to save. The law also makes it easier for small businesses to join and create multi-employer retirement plans, which ought to streamline the costs of administration and remove hurdles that discouraged small businesses from offering plans. 

There’s also increased incentive for employers to include annuities in their retirement plans. Annuities are indeed a “tool in the toolbox,” but we’re a little concerned this feature could be exploited by overzealous insurance firms…

Changes impacting individuals

The age to begin taking required minimum distributions (RMDs) is raised from 70½ to 72. Qualified charitable distributions (QCDs) may still begin at age 70½, however. The new age requirement will take effect in April of 2020, meaning those already in RMD status and those who will hit RMD status before April of 2020 will still use the 70½ figure.

The age cap for contributing to IRAs has been eliminated. Previously, an individual over the age of 70½ could no longer contribute to an IRA (though he could contribute to a 401k if he was still working and his employer offered one). That’s been scrapped, so age will no longer be a factor in determining eligibility to make an IRA contribution. 

Perhaps the most controversial component of the new law, and the one we spent the most time discussing in the newsletter, is the elimination of the “Stretch IRA.” Stretch IRAs currently allow non-spouse beneficiaries to take distributions from inherited IRAs over their lifetimes. For young beneficiaries, these distributions can be relatively small and they often have a proportionately small impact on the beneficiary’s tax situation. The SECURE Act requires IRAs to be emptied within 10 years, a considerably faster distribution schedule. While the potential for additional taxes owed is a factor in this, the more significant consequence (which we don’t think we fully appreciated when we wrote the newsletter) is the loss of tax-deferred growth that could be accumulating over the beneficiary’s lifetime. The Stretch IRA election is still available for beneficiaries who inherited IRAs before the end of 2019, but any IRAs inherited after 12/31/19 will be required to use the new 10-year rule. 

While many of the changes brought on by the SECURE Act will hopefully encourage more people, especially those with lower incomes and part-time employment, to plan for and save for their retirement, it’s clear that the elimination of the Stretch IRA feature is aimed squarely at the wealthy. We believe it will be important for individuals with large IRAs to revisit their retirement income and estate plans with their attorney, CPA, and financial advisor to assess the impact of the SECURE Act’s provisions and make any necessary adjustments. 

We are learning as much as we can about the new rules and planning opportunities; fortunately, the folks we follow have already spilled (and will no doubt continue to spill) a considerable amount of electronic ink on the subject. One example: there could be an enhanced benefit to converting a portion of a Traditional IRA into a Roth IRA in order to pay the taxes today and maximize the potential for future tax-advantaged growth. Having assets in both a Roth and a Traditional IRA offers additional flexibility for managing withdrawals in the most tax-advantageous way. 

As always, please do not hesitate to reach out with questions or to discuss how the SECURE Act may impact your plan. We also know that some of you (you know who you are) will be investigating this subject voraciously. We invite you to share any research or reading material you’ve found so that we may continue to expand our knowledge on possible tax and income strategies.

Wishing you the very best for a prosperous 2020!

P.S. For those of you who are inclined to get into the weeds with us, here’s a link to one of our favorite planning resources, Michael Kitces’s blog. He has written a long and detailed article on the SECURE Act and its implications. It is very thorough…

https://www.kitces.com/blog/secure-act-2019-stretch-ira-rmd-effective-date-mep-auto-enrollment/

The above article is for informational and educational purposes only. Neither the information presented nor any opinion expressed constitutes a recommendation or endorsement by Gore Capital Management nor Cantella & Co., Inc. of a specific investment or the purchase or sale of any securities.