The SECURE Act and recently passed CARES Act in response to the COVID-19 crisis create some unique retirement, tax, and estate planning opportunities. We referenced a number of these in our April Market Commentary. In this planning update, we highlight those most pertinent to individuals and provide additional details. Please contact us or your tax and estate advisors if you have questions on the changes discussed below or other planning considerations.
The SECURE Act |Setting Every Community Up for Retirement Enhancement
- Passed and signed into law on December 31, 2019 with applications for 2020 and subsequent years.
- Primary Objectives: Access to retirement savings, promote participation and preserve savings.
- Key Provisions:
- Required Minimum Distributions (RMDs): Increase age from 70 to 72.
- Repeal Age Limit for Traditional IRA Contributions: Individuals over 70 with earned income can now make traditional IRA contributions. Taxpayers who are over the income limit to contribute to a Roth IRA may want to consider funding a non-deductible IRA contribution and convert that amount to a Roth IRA, also known as a “Backdoor Roth” strategy.
- Repeal Stretch Provision on Inherited Retirement Accounts (IRAs and Qualified Plans): Non-spouse beneficiaries are no longer able to take distributions based on remaining life expectancy. Instead, these beneficiaries are now generally required to withdraw 100% of inherited account balances by the end of the 10th calendar year following the year after the account owner dies. Existing “stretch” distributions are grandfathered until the current beneficiary dies, then the 10-year rule applies. Special rules apply to eligible designated beneficiaries: a spouse, disabled or chronically ill person, person not more than 10 years younger than deceased account owner, and a minor child.
- These changes result in numerous considerations including:
- Taking a lump sum or pro-rata distributions
- Evaluating the benefits of IRA to Roth conversations
- Careful designation of beneficiaries
- Review Trust language and structure
- These changes result in numerous considerations including:
- Graduate Students Can Make IRA Contributions: Taxable, non-tuition fellowship and stipend payments are treated as compensation for purposes of making a traditional IRA contribution.
- Penalty Free Distributions for Birth or Adoption: Account owner avoids the 10% early withdrawal penalty for birth or adoption up to $5,000 per occurrence. Distribution must be taken within one year of birth or adoption.
- Qualified Charitable Distributions (QCDs) remain the same: Although the RMD age changes to 72, the age for QCDs remains 70 QCDs allow account owners to distribute up to $100,000 annually tax free, directly to qualified charities (no trusts, private foundations, or donor-advised funds). If a deductible IRA contribution was made in the same year as a QCD, the QCD is reduced by the amount of the deductible contribution. There are numerous considerations when evaluating the benefits of a QCD including whether it is optimum to spend down retirement or non-retirement funds first.
- 529 Plans: 529 account distributions up to $10,000 total (not annually) can be used to repay student loans; Expenses related to qualified apprenticeship programs are considered qualified expenses for 529 plans (Effective for distributions after 12/31/2018)
The CARES Act | Coronavirus Aid, Relief, and Economic Security Act
- Passed and signed into law on March 27, 2020.
- Primary objective: address the economic fallout of the COVID-19 pandemic in the U.S. by providing immediate relief to individuals and businesses.
- Key Provisions:
- Temporary Suspension of Required Minimum Distributions (RMDs): Distributions from IRAs and Qualified Plans are not required in 2020, including participants who reached 70 in 2019. Annual RMDs from inherited retirement accounts are also subject to a suspension in 2020.
- Special Rules for Charitable Giving In 2020: Taxpayers who itemize deductions can offset up to 100% of their income for cash gifts made to public charities during 2020. For taxpayers who take the standard deduction, they can deduct up to $300 per individual and $600 per joint for cash gifts made to public charities during 2020.
- Waiver of Early Withdrawal Penalties for 2020: IRA and Qualified Plan participants can take distributions up to $100,000 from their accounts in 2020 without incurring the 10% tax penalty for early distributions. These distributions are considered “coronavirus-related” and are available to qualified individuals who have experienced adverse financial consequences resulting from a reduction in work hours, lay off, quarantine, or furlough, or who are unable to work due to lack of childcare, and individuals (plan participants, spouses, or dependents) who have been diagnosed with the coronavirus.
- Increased Qualified Plan Loans: The maximum loan amount for the period March 27, 2020 to September 23, 2020 has increased from $50,000 to $100,000 or up to 100% of the participant’s vested balance. If a participant has an outstanding plan loan balance with payments due between now and December 31, 2020, each outstanding repayment has a one-year extension before a deemed distribution will occur.