At the end of 2019, Congress passed the most significant retirement security legislation in more than a decade.
Known as the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), this legislation went into effect on January 1, 2020, and impacts retirement and estate planning rules.
Here are a few of my biggest takeaways from the Act, along with some commentary:
RMDs Now Start at Age 72
The new rules delay the age at which you must begin taking Required Minimum Distributions (RMDs) from your Traditional IRA.
If you are already taking RMDs, continue taking them. The new rules don’t affect you. But going forward, the government gives you an extra two years and doesn’t require you to take distributions until you turn 72.
There are certain strategies you can and should be considering PRIOR to RMD age. So now that you have 2 more years on your side, this could very work to your advantage.
You Can Contribute to a Traditional IRA After Age 70½
As long as you have earned income, you can continue making contributions to your Traditional IRA at any age. This change is great news for anyone who wants to continue working and growing their retirement savings. Age 70 is the new 50, right? Many people may choose to maintain a job, especially now that people are living longer. Living to age 100 is certainly possible.
Since there’s no age cap on Roth IRA contributions, there’s no change there. BUT – more people are now eligible for Roth IRA conversions! Getting more money into a Roth has become more valuable than ever, and you can now continue to it in later years. Just be sure to work with someone to help avoid costly and irreversible mistakes!
“Stretch” IRAs Are Gone For Most People
It was good while it lasted. Since the “stretch” concept was conceived in 2002, people inheriting an IRA were able to take out minimal distributions for their own life expectancy. Now, if you inherit an IRA after January 1, 2020, you can no longer do that (unless you qualify for certain exemptions). Fortunately, if you inherited one already, you’re grandfathered in under the old rules.
Under the new rules, most beneficiaries of an inherited IRA will have to withdraw the full account balance and pay taxes on the distributions within 10 years. This is basically the IRS saying they want their tax money within 10 years, and no longer want to wait your entire lifetime to collect it. This means a new landscape when it comes to retirement and estate planning.
How will this affect you? One good place to start is reviewing your beneficiary designations. I also think that a sweet spot exists for people aged 60-70, and possibly in their 50s. I can really see an increased need for life insurance (and I am not a HUGE life insurance fan) in many scenarios. And I think we’ll see Roth IRA conversions become more of a premium strategy. But there are a number of planning options to consider, not just these.
…And Here Are Some Miscellaneous Tax Fixes
New Parents Can Take Out Penalty-Free Distributions For Births and Adoptions. Parents can now potentially withdraw up to $5,000 (or $10,000 if married) from their accounts without paying the early withdrawal. I’m not a big fan of this because it reduces one’s retirement fund, but whatever – it’s allowed now.
Kids’ unearned income is now taxed at the parents’ top marginal tax bracket (instead of the much higher trust tax bracket). Back to being reasonable.
The medical expense deduction threshold is back at 7.5% of Adjusted Gross Income for 2019 and 2020. This makes it easier to deduct.
529 college savings plans can now be used for apprenticeships and up to $10,000 of student loan repayments. This can potentially help many parents.
The deduction for up to $4,000 in qualified tuition and fees is now available again. I never liked losing that in the first place.
Bottom Line: Rules Change, but the Fundamentals of Planning Don’t
The SECURE Act offers both new opportunities to potentially maximize your planning and new pitfalls to avoid. We’re carefully analyzing how the rules could impact clients.
At the end of the day, we all save and we all owe tax…at some point. But there is nothing wrong with being diligent and making sure that you aren’t paying MORE than you owe. It’s advisable to review the new changes with a trusted financial professional.