As you may be aware, Congress passed the new SECURE Act on December 19th, 2019. This sweeping bill offers several adjustments to our current laws surrounding saving and preparing for retirement. The SECURE Act is poised to adjust the age caps on traditional IRAs and increase access to tax-advantaged retirement savings accounts. Below we’re outlining the most prominent changes of this new act and how they may affect your own retirement.
#1: RMD’s Pushed Back to Age 72!
Another big headline from the SECURE Act (Section 114) and quite honestly with a little more meat on the bone than the stretch, is the new RMD age moving from age 70 ½ to age 72. You might be saying “its 2 years, what’s the big deal?” but this will affect every single person with a pre-tax retirement account living past age 70 ½ . This is GREAT news for those individuals who take RMD’s only because they are forced to, not because they want or need to. They will now be able to delay them a couple more years.
Also, the idea of having to take an RMD at age 72 is much more clear and easy to figure out than the old rule that stated, you must take your RMD by the end of the year in which you turn 70 ½. Chalk one up for the good guys. This will not apply to individuals turning 70 ½ before 2020.
This allows your retirement accounts to mature for an additional year and a half. Depending on how much you have accumulated in your account(s) thus far, this additional 18 months could have a significant impact on your retirement savings.
#2: The “Stretch IRA” is Gone! …Except when it isn’t.
And just like that, the stretch IRA was gone. This will now be replaced with the new “10-Year Rule”. For us as financial advisors, the rule change removes a tool from our toolbox, but it creates other opportunities at the same time. As you may or may not know, under the old law a designated beneficiary could stretch the RMD’s out over the course of their own life, drastically lowering the dollars being distributed every year from defined contribution plans and IRA’s.
The SECURE Act now requires a 10-year withdrawal period. Under the 10-Year Rule, the inherited account must be distributed in its entirety by the end of the 10th year. However, there is great flexibility in the new law as they do not require an RMD schedule during that 10-year period. The account could be liquidated in the first year, the 10th year and everywhere in between without a yearly minimum.
This will allow us to take more money during years of lower income for our clients and potentially hold off during years where they may have a spike in income. Allowing clients to take advantage of tax efficient opportunities as long as the account has been completely drained by the end of the 10th year after death.
- Spousal Beneficiaries
- Disabled Beneficiaries
- Chronically Ill
- Beneficiaries who are within 10 years of the decedents age
- Children of the account owner whom are younger than the age of majority. Once the age of majority is reached, the 10-Year rule will apply from that point forward. (age of majority is different in each state)
#3: Qualified Charitable Distributions (QCD’s) Still Allowed at Age 70 ½
A strategy usually used to offset the tax liability created by an unwanted RMD, can still be used at age 70 ½ even though there is no longer an RMD. The QCD can still go a long way toward leveraging the standard deduction at tax time by taking that income completely off the tax return thus increasing the ratio of your standard deduction.
#4: Eliminating the Age Limitations on Contributing to IRAs
Previously, individuals were no longer eligible to contribute to their traditional IRA once they reached age 70½. Now, beginning in 2020, individuals of any age will be allowed to contribute to a Traditional IRA. The SECURE act has eliminated the previous age cap, allowing people to continue contributing to their IRA for as long as they continue working.1
This change is great news for seniors and could make a significant impact on their retirement savings, considering that more and more Americans 55 and older are making up a significant portion of the workforce. Today, 23.1 percent of the workforce consists of those 55 and older, compared to just 18.1 percent in 2008. And according to the U.S. Census Bureau, that percentage is projected to continue increasing to 25 percent by 2028.2
#5: Penalty-Free Withdrawals For Qualified Births & Adoptions
Section 113 of the Secure Act allows for a natural or adopted parent to take a $5,000 distribution from qualified plan or IRA for each parent ($10k total) without being subject to the 10% early withdrawal penalty. It is known as the “Qualified Birth or Adoption Distribution”.
The interesting part about the new exception is this: The distribution cannot happen until AFTER the qualifying even, nor do the funds have to be specifically used for the event. The only requirement is that there was a childbirth or adoption in that year.
Notably, the exception applies on an individual basis. Meaning, if both of a child’s parents have available retirement assets, each can make a Qualified Birth or Adoption Distribution of up to $5,000 for each child born/adopted.
While there are additional changes Law, above are a few of the most impactful ways in which Congress’s SECURE Act could be making a difference in how you save for retirement. Naturally, there is so many aspects of the Law we could not cover everything here, but we would love the opportunity to discuss the various pieces not mentioned, which may be affecting your specific situation. Use the link below to schedule a call so we can discuss this new law.
|About the Author|
James M. Comblo , CFF
is a Partner and the Chief Compliance Officer at FSC Wealth Advisors. His greatest passion in the financial services industry is helping clients accomplish their dreams both with investments and their personal lives. To learn more about him click here.
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