The final weeks of 2019 saw the passage of the SECURE Act, ushering in sweeping rule changes for retirees. The SECURE legislation- which stands for “Setting Every Community Up for Retirement Enhancement”- has a number of revisions to current tax law. In this article we’ll highlight the key changes of which investors should be aware.
The most significant change of the SECURE Act is to delay the age of Required Minimum Distributions (RMDs) from age 70 ½ to 72. Current law requires anyone who turns age 70 ½ to begin taking money out of their Traditional IRA account and pay taxes on the distribution. The new provision applies only to retirees who turn age 70 ½ after December 31st, 2019. If you fall in that category, you now can wait until age 72 to start your required distributions. Additionally, the bill eliminates the age cap for contributions to a traditional IRA. If you are earning income after the age of 70 ½ (with the new SECURE Act age 72), you can continue to contribute to an IRA. We consider these changes to be “enhancements” that can help retirees build and maintain larger retirement account balances.
The SECURE Act also addresses Inherited Traditional and Roth IRAs. In a tactic known as a “Stretch IRA,” account beneficiaries can spread out withdrawals from an Inherited IRA over the course of their life expectancy. The Act will eliminate this provision, requiring withdrawals to be completed from an inherited account within a decade. This will apply to decedents who pass after December 31st, 2019 and leave their retirement accounts to non-spouse beneficiaries. The more favorable old provisions will still apply to any IRA inherited from someone who passed before the end of this year. A surviving spouse is not impacted by this change, as he or she can transfer funds into their own IRA. We don’t classify this change as an “enhancement” for retirees, as it speeds up distributions and the payment of taxes on the account!
Some other highlights from the SECURE Act:
• Qualified Charitable Donations (QCDs) can still be made from an IRA account after you turn age 70 ½, even if you fall under the new rule of age 72 for required distributions (RMDs).
• The SECURE Act will encourage employers to offer annuities in their 401(k)s to provide a guaranteed income in retirement. Although we like the concept, Modus encourages retirees to proceed with caution in utilizing annuities. Annuity products often come with high fees that can eat into your retirement income.
• The Act provides incentives for small businesses to provide retirement plans for their workers, addressing the fact that many employees don’t have access to qualified plans. There are additional incentives for plans that encourage “auto-enrollment” whereby an employee is automatically enrolled in the plan and will participate unless they choose to opt out.
The SECURE Act includes other provisions and we’ve attempted to highlight the ones that have the largest impact. Our objective is always to keep you and your financial plan up-to-date, and we’ll be incorporating these changes in 2020. If you have any specific questions regarding the Act or your financial situation in general, please do not hesitate to contact us at Modus Advisors!
Ryan Peckskamp, Financial Advisor