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    The Secure Act

    Submitted by Joel Shabsin, CPA

    After languishing in Congress for the past 3 years, the Secure Act (Setting Every Community Up forRetirement Enhancement Act) was included in the budget bill that was recently passed to fund the government. As a result the Secure Act became effective with the President’s signature on the budget
    bill. This act will affect millions of Americans. It changes a whole lot of regulations pertaining to retirement accounts for both employers and for employees and self employed taxpayers.

    There are 8 key provisions included in the Act.

    1. Up until now, individuals who continued to work after they reached the age of 70 and ½ could no longer contribute to an Individual Retirement Account (IRA). The Secure Act removed the age restriction so now anyone with earned income can contribute to an IRA if all other conditions are met.
    2. Up until the passage of the Act, individuals with retirement accounts had to begin taking required minimum distributions when they became 70 and ½ years old. Under the Secure act, individuals who were not 70 and ½ by the end of 2019 do not have to begin taking RMD’s until they are 72 years old.
    3. The Secure Act eliminated the “Stretch IRA” where a beneficiary could take distributions from an inherited IRA over their lifetimes. The new rules require a beneficiary to draw down the account and pay the taxes on the withdrawals over 10 years instead of their lifetimes.
    4. The Act added a new exemption from the 10% early withdrawal penalty. A participant can withdraw up to $5000 in the event of a qualified birth or adoption if the funds are withdrawn within 1 year of the adoption or birth date with no penalty.
    5. The act changes the definition of part time workers for inclusion in employer sponsored retirement plans. Employees who work more than 1000 hours in any one year or have 3 consecutive years of at least 500 hours will be able to participate in employer retirement plans.
    6. The Secure Act allows employers to include certain types of annuities in the choices available to plan participants. Until now annuities were not eligible investment vehicles for 401K plans.
    7. The Act allows small employers to come together to set up and offer 401k plans to their employees with less fiduciary liability and lower costs than current law allows.
    8. The Secure Act establishes a $5000 tax credit for employers who start a retirement plan and also has a $500 tax credit for smaller employers who have automatic enrollment in their plan documents.

    Obviously the first 3 items above will affect many of our clients and we may have to change our thinking when advising clients. For example, in the pre Secure Act days, clients didn’t want to take their required minimum distribution because they had no need for the funds and didn’t want to pay taxes on the distribution. Now, with the low tax rates that will be in effect until 2026, it may be appropriate to take more than the required minimum distribution, convert the excess to a Roth IRA, pay taxes on the full distribution now rather than pass the tax burden on to the beneficiary in the future when tax rates may be much higher than they currently are. It’s not necessary to convert to a Roth IRA. Other than the tax effect on dividends and interest, putting the distribution into an investment account can accomplish the same effect as converting it to a Roth. When the beneficiary inherits the investment account, they will get a step up in basis to the value at the time of death. If they liquidate the investment account shortly after the IRA owner dies, there could be no additional taxes due.

    So maybe it’s time for some clients to bite the bullet and start reducing IRA balances before taxes go up in 2026 when the Tax Cuts and Jobs act sunsets. If, for example, the IRA’s owner’s taxable income is in the 22% tax bracket, ($85,525 single or $171,050 MFJ), at say, $100,000 MFJ it may make sense to take an additional $50,000 from the IRA and pay the tax now. Just watch out for the Medicare part B income related monthly cost adjustment if modified AGI exceeds $174,000 or the 10% early withdrawal penalty if the owner is under 59 and ½ years old.

    Things like this add value to your practice and can take only a few minutes to explain to a client at tax time. Plus it can generate additional billing if the client wants to know more about the suggestion.

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