Shortly before the end of 2019, the SECURE Act made a number of changes to retirement plans and IRAs. Many of the changes are technical in nature, but there are a few key elements you should be aware of. Overall, the legislation is a mixed bag. On the good side:
Required minimum distributions, which previously had to start no later than age 70.5, are now required to begin no later than age 72.
Those who work past age 70.5 are no longer prohibited from making IRA contributions.
Up to $10,000 from a 529 college savings account can be used to repay student loans
Medical expenses are subject to a 7.5% income floor; this number has changed back and forth numerous times over the past few years.
A provision that would have taxed children's investment earnings at very high rates was eliminated; the treatment of the "kiddie tax" goes back to the old way, which is to tax children's investment income at their parents' rates.
And on the bad side:
In what may be the most unfriendly move of the last decade for investors, inherited IRAs transferred to non-spouse beneficiaries (such as children) must be emptied over a maximum of 10 years. Previously, this could be taken over the beneficiary's lifetime. There are a few exceptions to this rule, but they won't apply very often. This means all funds have to be out of the IRA within 10 years of the original owner's death. The beneficiary may keep the funds and reinvest them, but all dividends and capital gains will be taxed as usual. Previously, these amounts could be shielded inside the IRA for a much longer time period.
This will substantially increase taxable income for IRA beneficiaries while they're making required withdrawals from an inherited IRA. For this reason, those who expect to leave a large IRA should strongly consider a Roth conversion.
In a similar vein, it may be beneficial for the IRA owner to take more than the required distribution, as non-IRA assets receive a step-up in basis at the time of death, and any eventual capital gains are taxed at favorable rates. IRA distributions are taxed at ordinary income rates.
It's easier for employers to place an annuity in a 401k. We would never recommend such a move, as many annuities charge fees 3-4 times higher than mutual funds. If you see an annuity in your 401k, it's almost certainly a poor choice. Shockingly, the SECURE Act gives broad immunity to employers who put high-cost, low quality annuities in their retirement plans.
