How The SECURE Act Is Changing Retirement Planning

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We all have one of those people in our family or at the office; a person who, no matter the people around them or where they are, they make you cringe as much as they might make you smile. They don’t care who they disagree with. They don’t care if they are politically correct. I’m talking about the people who talk politics all the time. Well, Congress just gave these types of people a lot to talk about. In fact, Congress gave all of us a lot to talk about, particularly those approaching retirement.

On Friday, December 20, 2019, the SECURE Act was passed. SECURE stands for “Setting Every Community Up for Retirement Enhancement” and is intended to strengthen retirement security for people across the country. The bill has put into place several changes, and I’d say that for the most part, the changes are positives.

As with anything, there are some tradeoffs. I’d like to go over some of the bigger changes today and how they might affect your retirement plan. These law changes will impact those approaching retirement, those already in retirement, and those who inherit an IRA from a loved one.

Changes to Required Minimum Distributions (RMDs)

Previously, you were required to start taking a required minimum distribution, or RMD, the year you turned 70.5 years old. Anyone with an IRA or 401(k) was required to withdraw a certain percentage (based on age) of their account each year. Essentially, this was the government saying you have deferred paying taxes on these funds long enough, and they want the tax revenue. This was not always an ideal situation, as many people I work with did not need the money at that age. The SECURE Act has pushed the age when you start taking your RMD to 72 years old. According to a MarketWatch article, the 70.5 age was based on life expectancies in the early 1960s and had not been updated since.

It’s important to note that account owners who turned 70.5 before December 31, 2019, should ensure that they have taken their RMD or have plans to do so prior to the deadline of April 1, 2020. Anyone who has an IRA and who turned 70.5 on or after January 1, 2020 will not need to begin taking required minimum distributions until 2022.

Changes to Traditional IRA Contributions

Previously, there was a maximum age of 70.5 that you could contribute to your traditional IRA. The SECURE Act eliminates the maximum age completely for those with an earned income. In 2020, the maximum contributions to all of your IRA accounts (traditional and Roth) is $7,000 for those aged 50 years and older ($6,000 for those under 50 years old).

Changes to Inherited IRAs or Stretch IRAs

Previously, anyone who inherited an IRA could stretch the IRA required minimum distributions out over their expected lifetime. This helped to potentially expand the tax liability out over several years or decades. With the exception of beneficiaries who inherit an IRA from a husband or wife, this benefit has been revised from lifetime to 10 years. This is one of the tradeoffs for all the positives in the law.

Beneficiaries of an inherited IRA will be required to withdraw all assets of that IRA within 10 years. Since regular required minimum distributions will no longer be required, but all assets must be out in 10 years, it will be important to talk to a tax professional when making the decision of when to withdraw the funds. If you have inherited an IRA from someone other than a spouse and you are still working, particularly if you are in your prime earning years, withdrawing this money will have tax implications that you want to be prepared for.

Again, note that spouses who inherit an IRA from a husband or wife will still be able to stretch the distributions out over their lifetime. The law also provides exceptions for minor children, disabled individuals, and people less than 10 years younger than the decedent. I’d recommend that if you have an estate plan in place, you review your plans with your estate planner to see if the SECURE Act necessitates any changes.

It’s important to note that these changes do not affect existing inherited IRA accounts. This only applies to accounts inherited in 2020 or later.

Your Next Steps

I see this law impacting two areas significantly, estate planning and retirement planning. Those of you who thought you had an estate plan in place need to meet with a professional to see how this law has impacted it. If you don’t have an estate plan in place, you should meet with a professional to put one in place.

The SECURE Act will affect how you plan for retirement, and a visit to your trusted financial professional to review your plan and how these changes affect it is highly recommended. Many parts of the SECURE Act go into effect this year, so you’ll want to prioritize visiting your estate and retirement planning professionals right away. If you do, the next time you’re at a social gathering and this new law comes up, you’ll know it fulfilled its purpose for you, and you can feel more confident in your retirement because of it.

Registered Representative offering securities through Cetera Advisor Networks LLC, member FINRA/SIPC. Cetera is under separate ownership from any other named entity.

Jason LaBarge, Managing Partner at Premier Planning Group
115 West Street, Suite 400 Annapolis, MD 21401  443-837-2520

Compliance Notes:

The 70.5 age was based on life expectancies in the early 1960s, the House said, and had not been updated since. - https://www.marketwatch.com/story/with-president-trumps-signature-the-secure-act-is-passed-here-are-the-most-important-things-to-know-2019-12-21

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