The SECURE Act

New legislation changes the rules for retirement planning.

On December 20, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law as part of a larger government spending package. The SECURE Act includes a number of important changes that impact retirement planning and presents a pressing opportunity for anyone with retirement benefits to review their retirement plans as well as their estate plans.

Below is an overview of some of the relevant provisions and key changes included in the SECURE Act that you may want to consider in planning for your and your family's future. This material can serve as a starting point for conversations with your tax and financial advisors, your legal counsel, and the Notre Dame Gift Planning team.

Increase in age for required minimum distributions (RMDs) from 70 ½ to 72

With the SECURE Act, minimum distributions from retirement accounts are not required until the year the retirement account owner turns age 72, rather than beginning at age 70 ½ (referred to as required minimum distributions or RMDs). This means that retirement account owners can now defer required withdrawals from their retirement accounts for a longer period of time. This applies only to individuals who turn 72 in the 2020 calendar year and thereafter. If a retirement account owner turned age 70 ½ prior to 2020, the previous rules will continue to apply. In addition, this provision does not affect the ability of individuals, beginning at age 70 ½, to make qualified charitable distributions (QCDs) (also referred to as IRA charitable rollovers).

Planning Opportunity: If you are turning age 70 ½ in 2020 and have a retirement account, you may want to work with your advisors to reconsider your withdrawal plans.

Modifications to RMD distribution rules for beneficiaries

One of the more significant changes included in the SECURE Act redefines the options for retirement plans when the account owner passes away. Previously, upon the death of the account owner, the beneficiary or beneficiaries who inherited the account were permitted to "stretch" the distributions and related taxes due on those distributions over the life expectancy of that beneficiary. Under the new rules, beneficiaries must withdraw all assets from inherited IRA or 401(k) plans (Roth and traditional) within 10 years following the death of the account holder, with certain exceptions noted below. Although RMDs are not required to be taken each year during this time, the entire account must be distributed no later than the end of the 10-year period.

Retirement beneficiaries who are excluded from these new rules include:

  • Surviving spouses;
  • Chronically ill or disabled beneficiaries;
  • Minor children, up to the age of majority (not including grandchildren); and
  • Individuals not more than 10 years of age younger than the account owner.

Planning Opportunities: If you have a retirement account that you had previously planned to leave to beneficiaries with the expectation that they could "stretch" the distributions over their life, you should work with your advisors to reevaluate your strategies. This is especially critical for individuals who named certain types of trusts as the beneficiary of a retirement account as additional consideration should be given to the plan to ensure that retirement benefits payable to the trust are handled as intended.

Fortunately, there are planning vehicles available that can preserve the retirement account "stretch" opportunity. These include a testamentary charitable remainder trust (CRT) or testamentary charitable gift annuity (CGA), both of which may be established at Notre Dame and could provide lifetime income streams to beneficiaries.

You may also consider making a gift of your retirement account to Notre Dame through your IRA beneficiary designation form. Typically withdrawals from traditional retirement accounts by individuals are subject to income taxes, while distributions made to charities at the account owner's passing are tax-free. This makes retirement assets one of the most tax efficient ways to accomplish your long-term philanthropic goals. The reduced ability to defer income taxes on retirement accounts under the SECURE Act makes these accounts even more attractive options for outright charitable giving at death.

To learn more about the specific advantages of charitable giving options that may be available utilizing your retirement accounts, please contact our Office of Gift Planning at 574-631-7164 or pgiving@nd.edu.

Repeal of maximum age threshold for traditional IRA contributions

Prior to the SECURE Act, individuals were not allowed to contribute to traditional IRA plans past age 70 ½. Beginning in 2020, this threshold has been lifted, and individuals with earned income can now continue to contribute to traditional IRA plans past age 70 ½.

Planning Opportunity: Since this change applies to retirement contributions in tax year 2020 and beyond, you have until April 15, 2021, to determine whether or not you are eligible and may benefit from an additional plan contribution. We recommend that you work with your advisors to determine if continuing to contribute to your IRA is beneficial for you.

Penalty-free plan withdrawals for expenses related to the birth or adoption of a child

Individuals may now withdraw up to $5,000 (per parent) from their respective retirement plans without penalty upon the birth or adoption of a child. The new law permits this "qualified birth or adoption distribution" from an "applicable eligible retirement plan" free from the 10% penalty that would normally be incurred on distributions taken prior to the account owner reaching age 59 ½. Distributions may be made during the one-year period beginning on the date the child is born or legal adoption is finalized.

Planning Opportunity: If you are expecting the birth or adoption of a child in the future, this change may be an opportunity to access additional funds. Keep in mind that while these distributions are penalty-free, they are still considered taxable income in the year that they are taken. Additionally, certain pensions and defined benefit plans are not eligible. You should speak with your advisors to determine whether your account is eligible.

Expansion of 529 plans

The SECURE Act expands permissible expenditures from 529 accounts to include apprenticeships, homeschooling, up to $10,000 of qualified student loan repayments, private elementary, secondary, and religious schools.

Other SECURE Act changes to note

  • Reinstatement of prior "Kiddie Tax" rules.
  • Increase in penalty for failure to file.
  • Expansion of retirement plans to certain part-time workers.

The SECURE Act will impact each individual in unique ways. We hope this information is helpful as you engage in conversations with your tax, financial, and legal advisors about your retirement and estate planning and charitable giving strategies. To learn more about the planning opportunities outlined above, please contact us at 574-631-7164 or pgiving@nd.edu. We welcome the chance to talk with and assist you. Thank you for all you do for Our Lady's University.

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