Brian T. Jones, CFP®, Chairman and one of the principals at CJM, outlines the four main tax changes to retirement accounts under the Secure Act that was passed in December 2019.
Hi, I’m Brian Jones and I’m one of the principals here at CJM Wealth Advisors. And in this episode, we’re going to talk about the SECURE Act and how it impacts a lot of the clients at CJM. Now, the SECURE Act was passed in December 20th, 2019. The SECURE Act is one of the most comprehensive changes to retirement planning that we’ve seen since the Pension Protection Act of 2006. There are four main changes to the SECURE Act that can potentially have an impact on CJM’s client base. In this video, we’re going to be going over each one of these at this particular point in time. Now the first one pertains to required minimum distributions, and this basically has to do with the start date that’s associated with, when do you have to take money out of your retirement plan? Under the old rules, when you turn 70 and a half, that was when we had to begin taking distributions out of your retirement plan. Under the SECURE Act, which began on January 1st, 2020, you don’t have to begin taking minimum distributions until age 72.
So this is a minor change for a lot of clients, but still, it’s an important date because the penalties for not taking out a minimum distribution out of your retirement account can be severe. So this is something that we always want to be aware of, and it’s something here at CJM that we always pay a lot of attention to when it comes to a planning perspective. So the first change has to do with the start date. The second major change that we see in the SECURE Act is IRA contributions past age 70 and a half. Prior to the SECURE Act passing, it was not possible to make an IRA contribution past age 70 and a half, even if you had earned income in the current year. Under the new rules, if you do have earned income, it is possible to make an IRA contribution past age 70 and a half.
Please keep in mind that for 2020, the base contribution is $6,000 and there’s an additional catch-up contribution of $1,000 for a total of $7,000 in the 2020 tax year. Now, the third change has to do with inherited IRA accounts. And this is probably the most complex of all the issues that we have seen so far in the SECURE Act, especially as it pertains to a non-spouse beneficiary. Under the old rules, a non-spouse beneficiary could create an inherited IRA account in their name, and they could stretch out the distributions over their own life expectancy. With prior instances across the client base, we’ve seen examples where those distributions were stretched out over 20, or in some places, more than 30 years for the retirees.
Under the new rules, this is not going to be possible. Going forward, the non-spouse beneficiary will face no required minimum distributions on an annual basis. However, at the end of the 10th year, the entire account, including earnings, must be distributed in its entirety. This is a major change for inherited IRA accounts, especially as it pertains to the taxation of these assets. The taxation period is going to be brought forward in a much shorter and compressed period of time. This potentially has the possibility of creating a much larger tax impact for clients without proper planning.
Now, please remember that there are exceptions for spouses, disabled individuals, and individuals not more than 10 years younger than the account owner. Also, for minor children and beneficiaries of an IRA account, there is a special exemption until they hit age 18, at which point in time, the 10 year rule will apply. Now the fourth and final change that’s in the SECURE Act has to do with regards to the birth or the adoption of a child. Beginning January 2020, parents of either adopting a new child or the birth of a child can take out $5,000 out of their retirement account without a federal penalty.
So both parents each can take out $5,000 for an aggregate of $10,000. Please keep in mind that while this is not subject to a federal penalty, it is, however, federal taxable as well as it is also state taxable, depending upon where you currently reside. As always, the topics discussed in this video are somewhat complex, especially as it pertains to, when do you start taking minimum distributions as well as what are my options with regards to an inherited IRA account? So if you do have questions, we recommend that you reach out to one of your planners here at CJM Wealth Advisors, so that we can schedule a time to talk, or trade emails, or even do a video conference like this, and we can discuss your situation in greater detail. I’m Brian Jones, and thanks for watching.