The SECURE Act (Setting Every Community Up for Retirement Enhancement Act of 2019) took effect in 2020. It passed Congress with broad bi-partisan support, ushering in the largest retirement planning changes since 2006. The SECURE Act made major changes to requirement minimum distributions (RMDs), which is where you have to withdraw a certain amount of money each year and pay income tax on the withdrawn amount.
Your Own RMDs: Under the old law, you had to start taking RMDs at age 70.5. Under the SECURE Act, if you have not reached age 70.5 by the end of 2019, you can delay RMDs until age 72.
No Age Limit on Contributing to an IRA: Under previous law, those working past the age of 70.5 were not allowed to contribute to a traditional IRA. With the new law, those working past the age of 70.5 are able to make an annual tax-deductible contribution to an IRA of up to $7,000 per person or $14,0000 per couple.
Inheriting a Retirement Account from a Spouse Stays the Same: Past and current law allow a surviving spouse to roll over the deceased spouse’s IRA or 401(k) into the survivor’s own account and treat it the same as his or her own retirement money. RMDs for those accounts remain based on the age of the surviving spouse.
Major Changes for Anyone other than a Spouse Inheriting a Retirement Account: For retirement accounts inherited from someone other than a spouse, the SECURE Act has a major RMD rule change. The SECURE Act removes the so-called “stretch” provisions. Previously, a non-spouse beneficiary of a retirement account could stretch out RMDs (sometimes using a stretch trust) over their own life expectancy, to delay withdrawals and income taxes on withdrawals. With the new Act, if an owner of an IRA or 401(k) leaves these accounts to a non-spouse beneficiary, that beneficiary will only have 10 years after the year of death to withdraw the entire retirement account and pay income tax on it, unless exempted. In addition to surviving spouses, minor children and the chronically ill and disabled are exempted. The new rule applies to deaths in 2020 and thereafter, not to retirement accounts inherited prior to 2020.
However, from a law practice perspective, losing the option to do a stretch for non-spouse beneficiaries doesn’t really hurt most people. In many cases, clients could expect their beneficiaries to draw down inherited retirement accounts pretty quickly for needs such as paying off a mortgage, educational expenses, cushion in their budget, travel expenses, etc. Many clients didn’t need to worry about letting beneficiaries stretch in the first place.
Wherever you are on the path to retirement, it is important to regularly check on your plan. Financial planners, CPAs, and attorneys can help. Each of these professionals has a different set of skills to help in making wise decisions. You may be able to interview them at no cost to see if they can help and if they are a good fit for you. Review and update beneficiary designations on IRAs and 401(k)s. However, don’t ever name minor children by name on those forms – that creates a whole different set of problems.
There is an article on that topic elsewhere on my website. Review your will and/or trust. Review your tax situation. Consider whether converting a traditional IRA to a Roth IRA would lower your income taxes in retirement and your beneficiaries’ taxes if they inherit the account. Each situation is unique, but no matter who you are, it is never too late to start or update a plan for retirement savings.
Kim K. Steffan is an attorney with Steffan & Associates, P.C. in Hillsborough. She can be reached at (919) 732-7300 or firstname.lastname@example.org.