I am 68 years old and have an IRA with what I hope is enough money for me to able to live on comfortably and be able to leave some to my children when I pass away. I know the New Year brings new tax laws, which is always confusing. Lately, I have heard of the “Setting Every Community Up for Retirement Enhancement” law but what is it and how may it affect my retirement planning?
– An Old Guy
Dear Old Guy,
The law you are referring to is the SECURE Act, an acronym for the “Setting Every Community Up for Retirement Enhancement,” which was passed by Congress in late December 2019 and signed into law by the president on Dec. 20, 2019.
Today, many of us have retirement savings in accounts generally referred to as individual retirement accounts, or IRAs. With the passage of the SECURE Act, there will be significant changes to how our retirement savings will be governed after Dec. 31, 2019. This article discusses some of these changes and may not be the final word on how the new law is interpreted and applied. For the individual, these provisions appear to have the most significant impact:
1. Under pre-2020 rules, individuals were required to begin taking distributions from their IRAs when they reached age 70 ½. These distributions are referred to as “Required Minimum Distributions” or “RMDs”. Under the Secure Act, the law raises this age to 72. However, the law only applies to person who turn 70 ½ after Dec. 31, 2019. If you reached 70 ½ before Jan. 1, 2020, then you must take your RMD in 2019, 2020, etc.
2. Under the law before the SECURE Act, a person could leave his/her IRA to a beneficiary who could, in turn, receive distributions from the IRA over the beneficiary’s lifetime. This is referred to as “Stretch IRAs” because the benefit and potential growth in the IRA account could be “stretched” over a younger person’s lifetime. Under the Secure Act, these inherited IRAs must be distributed to the beneficiary within 10 years which may have a significant impact on one’s estate plan. (This should be discussed with your financial planner or estate planning attorney.) There are exceptions for spouses, minor children and certain others. The Secure Act only applies to IRAs inherited in 2020 and beyond.
3. The SECURE Act now permits individuals to contribute to their traditional IRA accounts at any age, as long as the individual has earned income. Prior to the Secure Act, persons past the age of 70 ½ were prohibited from contributing to their traditional IRAs.
4. The SECURE Act permits new parents to withdraw up to $5000 from an IRA or an employer-sponsored retirement plan to pay for adoption and/or birth expenses. Taxes are still due on the withdrawal pre-tax contributions, but the early withdrawal penalties do not apply to the early withdrawals.
There are other changes taking place under the SECURE Act and the ones listed in the article are, obviously, subject to further interpretation and regulation by tax authorities. Hopefully, this article will encourage you to consult with your financial advisor or estate planning attorney about the effect this new law may have on your estate planning, particularly, if your plan involves the disposition of your retirement savings.
Disclaimer: The information contained in this article is general in nature and not to be taken as legal advice, nor to establish an attorney-client relationship between the reader and F. Lee Weaver or Weaver | Budd, Attorneys at Law. Submit your questions for The Fine Print to: email@example.com