How the SECURE Act will Impact your Retirement Plan
With the fall of pensions and the Social Security Program shaky at best, we as American savers need all the help we can get to retire on our own terms. In the interest of providing a little tailwind for investors, the Setting Every Community Up For Retirement Enhancement (SECURE) Act was signed into law and took effect on January 1, 2020. Though a mouthful, the new rules appear well-balanced by providing retirement savers with more opportunity to grow their retirement accounts while keeping the IRS happy by changing inherited IRA rules. The SECURE Act will impact families differently based on their own retirement plans, and like with most legislation, there’s good news and bad news.
The Good News
More time to save into your IRA
The SECURE Act eliminates the age restriction for saving into your Traditional IRA as long as you have earned income. Before 2020, you were not able to contribute into your Traditional IRA past the of 70 ½. Because people are living longer and retiring later, Congress wanted to provide more opportunity for investors to save into retirement accounts.
The new rule extends the maximum age to make Traditional IRA contributions to 72, as long as you have earned income, and it allows retirement savers to defer more of their income. Keep in mind, this does not impact Roth IRA rules, and you can continue contributing into this account with no maximum age restriction.
Start IRA Withdrawals Later
You may be familiar with Required Minimum Distributions (RMDs) with your Traditional IRA. Because your IRA is tax-deferred, and the government taxes you on withdrawals you take from it, Uncle Sam wants you to disburse money from your IRA in order to collect taxes.
Before 2020, the RMD age began at 70 ½. The Act extends the RMD age to 72 beginning in 2020. This basically means that your IRA can grow tax-deferred slightly longer until you turn 72 years old when withdrawals become mandatory.
More Flexibility with Education Funding
The SECURE Act also provides more flexibility with 529 plans used for funding education-related expenses. With the rise of student debt, the Act now allows students and graduates to use 529 funds towards qualified student loan repayments (up to $10,000 annually). Though many wish for a higher annual amount, it’s a step in the right direction to provide flexibility with paying off student loans since 529 plans are a popular education savings vehicle.
Birth or Adoption Help
The Secure Act also allows withdrawals up to $5,000 from IRAs and other retirement plans to pay expenses related to the birth or adoption of a child. Under prior law, these disbursements could have been subject to a penalty.
The Bad News
No More Stretch IRAs
Prior to the SECURE Act, non-spouse beneficiaries of IRAs - typically children or grandchildren - could stretch their inherited IRA over the course of their lifetime which, for some, allowed the account to grow tax-deferred for a longer period of time. That means if you inherited an IRA from someone other than your spouse, you could wait to take RMDs based on your own life expectancy tables and extend the growth of the account. The IRS wasn’t too happy about waiting on their tax payments with this old method.
The Act now requires that non-spouse beneficiaries withdraw their entire IRA balance within 10 years of the original account owner’s death. There’s no required minimum distribution for each of these 10 years, but the entire balance must be distributed by the end of 10 years. This could be a bummer for people in their 40s and 50s, and in their peak earning years, since these withdrawals may push them into a higher tax bracket. If this might be the case in your retirement plan, it will be in your best interest to be strategic as to when and how much you will distribute from an inherited IRA so you aren’t paying too much more in taxes.
Actions to Consider with your Retirement Plan:
Roth conversions - Roth conversions, a strategy in which you transfer money from a Traditional (pre-tax) IRA or retirement plan into a Roth (after-tax) IRA, may be more attractive to investors with large retirement account balances. Though you are taxed on the amount converted during the year the Roth conversion is made, that money can then grow tax-free resulting in a larger nest egg for your retirement or to pass on to heirs.
Charitable giving from IRAs - Consider making Qualified Charitable Distributions (QCDs) from your IRA if you are charitably-inclined. These distributions made directly to qualified charities can also satisfy RMD requirements which give both you and your charity of choice a tax break.
Revise or establish a new trust - Depending on your situation and wishes, a trust could be named as a beneficiary of your IRA to skirt some of the withdrawal rules enforced by the SECURE Act.
Fund a 529 plan - There’s no better time to open and fund a 529 plan if you are considering helping your kids or other loved ones with education expenses and potential student loans.
Do you want to talk about how the SECURE Act will impact your financial plan? Reach out to me at Ben@coveplanning.com or schedule a free consultation call.
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Ben Smith is a fee-only financial advisor and CERTIFIED FINANCIAL PLANNER™ (CFP®) Professional with offices in Milwaukee, WI, Evanston, IL and Minneapolis, MN, serving clients virtually across the country. Cove Financial Planning provides comprehensive financial planning and investment management services to individuals and families, regardless of location, with a focus on Socially Responsible Investing (SRI).
Ben acts as a fiduciary for his clients. He does not sell financial products or take commissions. Simply put, he sits on your side of the table and always works in your best interest. Learn more how we can help you Do Well While Doing Good!
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Ben Smith, and all rights are reserved. Read the full Disclaimer.