The SECURE Act is spurring conversations among financial industry professionals, in particular specialists who assist people in planning for retirement.
Clients should be keenly examining the changes in close discussions with their trusted advisors. Let’s examine the basic changes in the new law, which can form talking points when you next make contact with your customers – and that should be soon.
Congress passed the SECURE Act with unusual alacrity, completing ratification last December. The president promptly signed the measure into law, indicating its importance across partisan boundaries. The Act contains numerous provisions aimed at improving access to retirement products and bolstering savings rates among Americans of all ages. For example, small businesses should now find it easier to sponsor 401(k) plans. For most of our clients, the key changes include expanded age limits for late-life contributions to qualified retirement accounts, new rules on taking required minimum distributions, and a few others.
The previous age limit for making contributions to IRA accounts – in the pre-SECURE Act world, capped at 70½ – has been eliminated. This benefits seniors who want work a few extra years and boost their retirement income with a last-minute top-up. We know plenty of clients who plan to do just that, and we’re making sure they know about the new rules.
Some senior-age clients may be working and making IRA contributions, while simultaneously taking RMDs from other qualified retirement accounts. Customers sometimes wonder if they can use the RMD funds to top-up their IRAs. The simple answer is no: IRA contributions must come from paid compensation – that is, earned income. If clients raise this question, the benefits of a Roth IRA, which has no RMD requirement and offers flexible tax advantages, can be offered as a useful alternative.
Under the old regime, qualified charitable distributions, or QCDs, could be made from IRA accounts starting at age 70½. The mandatory age for taking RMDs has now been raised to 72, and clients may wonder if the QCD age limit has been shifted, too. The answer again is no: the SECURE Act does not include any provisions affecting the QCD age boundary.
Concerning QCDs, the Act does raise a few issues that need consideration. Under the old regime, anyone at least 70½ years old could make a QCD of up to $100,000/year directly from an IRA. This met the RMD requirement, while avoiding any boost to taxable income – a real blessing for clients vulnerable to a tax hit. That’s how it used to work.
The RMD threshold age is now set at 72. QCDs made earlier – during the pre-Act era, during which the account holder presumably reached 70½ – can no longer be used to cover current or future RMD requirements. One specialist warns that people contributing to IRAs after age 70½ should think twice about using those accounts as a source of QCDs: recall that the QCD does not contribute to taxable income. There’s a further complication: if a senior 70½ or older takes the tax deduction for contributing to an IRA account, that latter sum is deducted from the QCD amount that can be used to cover an RMD. It’s a bit convoluted, so clients need to discuss the matter with their advisors.
When structuring the provisions of their wills, people sometimes direct the transfer of an IRA or 401(k) to a 501(c) charity. Some clients are worried that the new law may have introduced changes with negative tax implications for this sort of strategy. We can easily calm their fears: the SECURE Act does not contain any such worrisome provisions.
For more information, please read:
The Secure Act’s New Rules Are Causing a Lot of Confusion. We Answered Your Most Frequent Questions. | Barrons