How the SECURE Act May Impact Your Retirement Planning
The SECURE Act (Setting Every Community Up for Retirement Enhancement) was signed into law Dec. 20, 2019. With it came significant changes to the retirement planning landscape. This article provides an overview of the Act sections that may impact your retirement planning choices.
No More Inherited Stretch Provision (generally)
Probably the most significant change coming from the Act is the elimination of the life expectancy distribution option for most non-spouse beneficiaries. For IRA and employer plan owners who pass away in 2020 and beyond, beneficiaries will be required to liquidate the account by the end of the 10th year following the year of death. However, certain individuals called “eligible designated beneficiaries” will still be allowed to use the old stretch rules:
- Beneficiaries less than 10 years younger than the decedent
- Chronically ill or disabled individuals
- Certain Minors
- They must begin the Required Minimum Distributions (RMDs) the year following the year of the owner’s death
- When the minor reaches the age of majority, the 10-year requirement begins
- Only children of the deceased have this option – minors of a non-parent will have the 10-year requirement begin right away
For IRA and employer plan owners who died in 2019 or before, those beneficiaries can continue using the old life expectancy rules. For grandfathered accounts and for eligible designated beneficiaries, two sets of beneficiary rules now apply.
Required Minimum Distributions (RMDs) to begin at 72
To account for the increasing longevity of retirees, the RMD age will now begin at 72 rather than 70 ½. This new rule is effective immediately; anyone turning 70 ½ in 2020 will not be required to take a distribution until the year they reach age 72.
Those who turned 70 ½ in 2019 must follow the old rules and will still be required to take an RMD in 2020; they are not allowed to defer their RMDs to age 72.
Elimination of age limit
Previously, an individual could not contribute to a Traditional IRA once they reached age 70 ½. They could, however, contribute to a Roth IRA if they or a spouse had earned income. The SECURE Act removes the age restriction for Traditional IRAs, so now anyone at any age can contribute if they or a spouse are still working.
There is a new penalty exception for birth or adoption expenses: Parents under the age of 59 ½ will now be able to withdraw up to $5,000 penalty-free to help cover these expenses.
And when it comes to college expenses, parents can now withdraw up to $10,000 from a 529 to repay a student loan for a plan beneficiary or siblings of the plan beneficiary. This $10,000 is a lifetime limit per beneficiary.
There are several immediate planning opportunities available to you:
- Now is the time to review your beneficiary designations -- Since the SECURE Act changes the outcome for many inherited retirement accounts, it is important to review designation on IRAs and 401(k)s. The beneficiary designations determine who the accounts will pass to once the owner dies. Take the time and make sure all your beneficiary designations are accurate and that they still align with your intended goals.
- If you are turning 70 ½ in 2020 -- The government is giving you an extra break if you plan to continue working past this age: you can take advantage of contributing to a Traditional IRA. While RMDs must still begin at 72, the tax deduction of the contribution can help offset some of the tax liability of the RMD distribution.
- If you have an IRA with non-spouse beneficiaries -- Let’s discuss the opportunity of a ROTH conversion. This could be a useful strategy for those who do not want to saddle beneficiaries with the tax consequences of inheriting their qualified accounts.
Be aware that some custodians or providers of IRA accounts might not have had a chance to update their systems yet and you may receive automatically generated letters about Required Minimum Distributions under the old 70 ½ rules. If you have any questions, we’re just a phone call away.
While the general rules seem simple enough, it’s the finer details that often trip up individuals. We’re here to provide you with planning strategies during times like this.
Please feel free to reach out to us with any questions you have regarding the SECURE Act and how it affects the retirement planning you are doing.
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The Representative is neither a tax advisor nor attorney. For Information regarding your specific tax situation, please consult a tax professional. For legal questions, including information about estate planning, please consult your attorney.