James P. Terwilliger, Phd, CFP®
Senior Vice President - Senior Planning Advisor
[email protected]941.366.7222 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 Canandaigua National Trust Company 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. Canandaigua National Trust Company of Florida is an affiliate of Canandaigua National Bank & Trust. Investments are not FDIC insured, not bank deposits, not obligations of, or guaranteed by, Canandaigua National Bank & Trust or any of its affiliates, including Canandaigua National Trust Company of Florida. 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 contact your legal, tax or financial advisor. Investments and services may be offered through affiliate companies.