With so many people struggling to save for retirement, Congress knew something needed to
be done: On Jan. 1, 2020, a new federal law took effect with the goal of helping Americans save and plan for retirement.
The SECURE Act, short for Setting Every Community Up for Retirement Enhancement Act, is the most significant change to retirement legislation in more than a decade.
Let’s look at some of the major changes and how they might affect your retire- ment accounts.
Because life expectancy has increased and Americans are working longer, the SECURE Act raised the age for taking required minimum distributions (RMDs) from age 701⁄2 to 72. The change begins for the 2020 tax year, so it doesn’t apply to 2019 distributions.
Increasing the age gives people 18 more months of tax-deferred growth.
It also gives those still working more time to add money to their traditional IRA (up to $7,000 this year for those 50 and older) as well as more time to convert a traditional IRA to a Roth IRA. The money you move will be taxed now, but your withdrawals will be tax-free. Another new provision allows those who are over age 72 (and still working) to continue contributing to their IRA. They must still take RMDs, but the option to continue contributing is a nice benefit for many older workers.
While the age increase allows for more flexibility with planning, we recommend speaking with your tax advisor about your situation for 2020 and beyond.
The new RMD age of 72 didn’t change the age at which someone is allowed to use their IRA to make qualified charitable distributions (QCDs). An individual who is 701⁄2 and older is still allowed to give up to $100,000 a year from their traditional IRA to a qualified charity.
Taking funds from an IRA and giving directly to a qualified charity is still one of the best options for lowering taxable income for those over age 701⁄2.
Under the law, non-spouse beneficiaries no longer have the option to receive and “stretch out” tax-deferred distributions from an inherited IRA. Many people utilize a stretch IRA to pass money to their heirs. Under the SECURE Act, IRA beneficiaries now have only 10 years from the death of the account owner to fully liquidate the account.
If you plan on passing an IRA to your loved ones, consider converting the account to a tax-free account, like a Roth IRA. The money will grow tax-free and be distributed to your beneficiaries tax-free.
They’ll still have to take the money out in a 10-year time frame, but they also have the option to let that money sit a full 10 years before they liquidate it.
The Roth IRA is the ultimate estate- planning vehicle that allows your money to grow after death.
Timing matters, however: When converting to a Roth IRA, the account must be open for at least five years. If the Roth IRA is less than five years old at the time of the original owner’s death, beneficiaries will owe taxes on what they withdraw.
With more workers looking for guaran- teed income in retirement, the SECURE Act is providing more options. Before the new provision, employers were allowed to offer annuities in 401(k) plans, but it wasn’t easy.
Now employers don’t have to be afraid of legal liability if the annuity provider fails to deliver. Annuities are complex, so speak with a financial professional to find out if you should consider an annuity in your retirement plan.
Another benefit of the SECURE Act is that it allows new options for repaying student loans.
If families have money left over in a 529 education savings account (typically used to pay for college expenses), they can withdraw up to $10,000 over a student’s lifetime to repay student loan debt.
This is just a small look at the SECURE Act and how it could impact retirement planning. If you have questions about how you may be affected, please reach out. Working with a financial advisor can help clarify your personal and financial goals.
Skip Johnson is a founding partner and lead advisor at Great Waters Financial in Minneapolis. For more than 11 years, Skip and his team have been tailoring customized retirement plans to help their clients chart a course toward financial freedom and a secure retirement. Learn more at greatwatersfinancial.com.