Newly signed into law, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was designed primarily to help individual Americans save for retirement. While the Act sets forth numerous provisions, the three components below are particularly worth understanding as they could significantly affect your retirement and estate plans.
Eliminates the contribution age limit
The SECURE Act removes the rule that individuals cannot make contributions to traditional IRAs from age 70-1/2 and beyond. Contributions are now permitted at any age. Individuals must still meet existing eligibility requirements as defined by the IRS, such as having taxable compensation. And the new rule does not apply to rollover contributions into traditional IRAs.
This provision allows individuals to save longer for their retirement and is particularly apt since Americans are generally working longer today.
This provision does not apply to tax year 2019 for contributions made through April 15, 2020. It goes into effect for 2020 plan year contributions.
Increases the age for RMDs
With the Act, the age when an individual must begin taking required minimum distributions (RMDs) moves from 70-1/2 to 72, starting with people who reach age 70-1/2 after Dec. 31, 2019. This change could help a person’s retirement savings gain earnings by allowing additional time for tax-deferred growth within the IRA or 401(k) if the individual wants to delay taking money out of the account for as long as possible. The rule applies to IRAs, as well as 401(k), 401(a), 403(b) and 457(b) plans.
Individuals must still wait until age 59-1/2 to withdraw funds without incurring a 10% penalty.
Eliminates “stretch” IRAs
Non-spouse beneficiaries have traditionally been allowed to withdraw money from inherited accounts over their lifetime. This allowed the money in the account to continue growing, potentially for decades. With the Act, the time limit for full distribution is now reduced to 10 years from the date of the original account owner’s death, reducing the amount of time the funds can grow. (Note that a beneficiary may opt to take no distributions for the first nine years and withdraw the entire balance in year 10.) The rule applies to IRAs, as well as 401(k), 401(a), 403(b) and 457(b) plans.
Some beneficiaries are exempt from the new rule and will still be allowed to take distributions over their lifetime. Known as eligible designated beneficiaries, these include:
- Surviving spouses (RMDs generally will not begin until the year the original account owner would have reached age 72)
- Disabled persons (if they qualify for a Social Security disability)
- Chronically ill persons
- People not more than 10 years younger than the original account owner
- Minor children (when the child reaches the age of majority, the 10-year rule will apply)
If you have named trusts as beneficiaries of your IRAs or 401(k) assets, these changes mean you should revisit the language in your beneficiary designations and any applicable trusts to ensure it still fulfills your intentions.
Time for a review
These three components are just the tip of the iceberg. The SECURE Act includes numerous other provisions, many of which went into effect on January 1, 2020. That makes now an ideal time to check in with your financial, retirement and estate advisors to see whether it makes sense to adjust your existing plans. For instance, you may want to review your beneficiary designations, reassess your use of trusts, or revise your planned retirement contributions or withdrawals.
With people generally living longer and working longer to fund their retirement, it’s more important than ever to make an action plan to help avoid any negative impacts the Act could have on your retirement plans. Your Private Banker can help you get started.
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