SECURE Act and Your IRA
A new set of laws came into effect on January 1st, and if you’re looking to retire soon or have legacy planning wishes, they’re likely to affect you. The SECURE (Setting Every Community Up For Retirement Enhancement) Act aims to reform retirement across the nation, by both reducing the costs around retiring and enabling more access to lifetime income options in employer plans. Unfortunately, the effects of such changes may not be positive for everyone especially if you already planned for a certain outcome.
Increase in Required Minimum Distribution (RMD) Age
The Required Minimum Distribution Age is set by the government and obligates an IRA account holder to withdraw a minimum amount of funds every year once turning the set age. The RMD Age was previously set at 70.5 and has now increased to 72 years due to the increased life expectancy in the US today. In fact, the number of American’s working past 70 years old has almost doubled over the past 2 decades!
This new rule change impacts individuals that have not attained age 70 ½ by December 31, 2019.
An increase in the RMD age allows for those with earned income to continue to contribute to their IRAs. It may allow for more time for your investments to grow. It extends the time frame in which one can do a Roth conversion. For those with charitable interests, the Qualified Charitable Distribution (QCD) age remains at age 70 ½. This can be significant as it creates a 1-2 year window where IRA distributions may qualify as charitable distribution but not as RMDs. This can greatly reduce your taxable income up to $100,000. (As always there are some rules to this strategy.)
There are many exceptions to this rule, especially for government workers and those who have already started their RMDs.
Elimination of Maximum Contribution Age
Conveniently enough, the cap on IRA contributions by age has also been abolished within these new SECURE Act changes. Formerly, the government completely prevented IRA contributions past the age of 70.5, in line with the RMD. However, this age cap has now been removed, in theory allowing savers to indefinitely continue bringing money into Individual Retirement Accounts and the other accompanying benefits (such as possible reduction of taxable income) over their lifetime.
The End of Stretch IRAs
IRAs inherited from a non-spouse are often referred to as “Stretch IRAs” since their required minimum distributions could be taken over any period of time, including just a few years or a few decades. The amount required to be withdrawn was also based on the age of the person inheriting the account rather than the owner. Having a longer time period to receive the funds was useful for some individuals since withdrawing fewer funds over a longer period of time may not increase their tax bracket.
However, the SECURE Act changes this. As of January 1st 2020, those inheriting an IRA are required to withdraw the entirety of funds over the next immediate 10 year period.
Of course, there are exceptions.
Eligible designated beneficiaries not impacted by the new rules:
• Surviving spouses
• Minor children, but not grandchildren
• Disabled individuals under the IRS rules
• Chronically ill individuals
• Individuals not more than 10 years younger than the IRA owner (generally, siblings around the same age).
And these exceptions only exist while the beneficiary is within the category. For example, if you turn 19 (or the age of majority in the state) you become subject to the new rules.
This may be problematic for some heirs, such as those who inherit IRAs in their peak earning years of the 40s or 50s. This is because having to withdraw the entire IRA over a 10 year period could drastically increase taxes owed. Unsurprisingly, this change is the biggest tax revenue generator from the SECURE Act.
So, How Does This Impact Your Saving?
Maybe you’re now trying to decide whether saving in a traditional IRA is the right thing for your circumstances or who to name as a beneficiary for the most effective inheritance of your savings. Roth conversions may still be an option and if you are still working you may be able to contribute to your IRA
Schedule a call with me here to discuss your options.