The SECURE Act, Setting Every Community Up for Retirement Enhancement Act, has passed in Congress, along with the nearly $1.4 trillion spending bill for FY 2020. This is the first major piece of retirement legislation in a decade. The legislation affects employers, but here we are going to focus on how it will affect you as an individual investors.
The new legislation has 3 main provisions that will affect you and your retirement account:
1. Removal of the Stretch IRA Provision
The removal of the stretch IRA provision means that beneficiaries of IRAs and defined-contribution plans will be required to take all distributions by the 10th year following the account owner’s death. The stretch IRA provision had previously allowed beneficiaries to take distributions over their life expectancy. Do note that this change will not apply to the spouse of the deceased account holder. Also, current stretch-IRA holders are grandfathered into the old rules.
Money from these inherited retirement accounts will now have to come out faster, reducing the tax-deferred growth benefits of inheriting an account. Additionally, since it will now be distributed over 10 years, it will be taxed at higher rates than if it were spread out over a longer time period. This is because many beneficiaries will be in peak earning years when taking these distributions, potentially bumping them into a higher tax bracket.
2. Increase of the Required Minimum Distribution (RMD) Age
Previously, retirement account owners needed to start taking their RMD at the age of 70½. The SECURE Act increases this age to 72. This gives you an additional 18 months to take advantage of the tax benefits provided by retirement accounts before required withdrawals begin.
3. Removal of the IRA Contribution Age Limit
There will no longer be an age limit when making contributions to a traditional individual retirement account. The limit was previously 70½. While the age limit has been removed, the income limitations will remain. For participants 50+, you will be able to contribute $7,000 to a traditional IRA in 2020.
A few things to think through moving forward:
- Check the beneficiaries on your IRA. With the stretch provision no longer an option, consider naming a spouse since spousal transfers are kept to a separate set of rules.
- Consider a Roth conversion. One alternative for those who have saved roughly $1million – $5 million in IRAs is to do piecemeal Roth conversions over a number of years to build a tax-free account you can leave to your beneficiaries. This allows you to take advantage of lower tax rates.
How We Can Help You
You have spent many years working hard and saving to enjoy a comfortable retirement. If you need help understanding how these changes will affect you, and your beneficiaries, contact us today.
