Are You Feeling SECURE about Retirement?
Like most legislation these days, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 has some good changes and some not-so-good changes in store for Americans who are near or in retirement. And it will be up to them to decide if the new law -- which went into effect in January -- truly lives up to its name or its acronym.
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While the SECURE Act includes seven major provisions, three could have a direct effect on savers who've been saving money in tax-deferred retirement accounts. There are also potential ramifications for their beneficiaries.
Here's what you need to know:
Required Minimum Distributions (RMDs) now start at age 72.
The number you see at the bottom of your IRA or 401(k) statement every month can be a little misleading. The balance in that account isn't really all yours; you still owe taxes on it. And Uncle Sam isn't going to wait forever for the money.
But he is going to wait a little longer than he once did. The age when savers were required to begin annual distributions used to be 70½. Under the SECURE Act, the age for starting RMDs has been pushed up to 72 for anyone born on or after July 1, 1949.
In case you're wondering, the six-month grace period for that first payment remains the same. While the law says you must take the distribution by Dec. 31, in reality you have until April 1 of the year after you turn 72 to take your first RMD. (For further details, see RMDs: When Do I Have to Take One?)
Why is this important? The new law gives younger IRA owners additional time for their retirement money to grow tax-free. The change also delays additional taxable income, potentially reducing how much you'll pay in total taxes on your IRA money.
The "Stretch" IRA is no longer available to most non-spousal beneficiaries.
If you plan to leave a tax-deferred account to your beneficiaries, you should know they'll potentially inherit a tax debt along with it. In the past, a beneficiary could take RMDs based on his or her life expectancy and stretch the distributions over decades, making those taxes more manageable. The SECURE Act takes away this option for most non-spousal beneficiaries (such as adult children). Instead, they'll be required to empty the account they inherit and pay the taxes within 10 years.
One notable exception: Inherited IRAs established before Jan. 1, 2020, are grandfathered in. Those beneficiaries can keep stretching the RMDs over their lifetime. The change also doesn't affect spouses, disabled or chronically ill beneficiaries, beneficiaries who are less than 10 years younger than the original account owner and minor children of the original account owner (until they reach the age of majority).
Why is this important? You could be leaving a tax-burdened gift to your adult children just as they're reaching their highest earning years. They won't have to take the money out in any specific increments or on a schedule; but the money must be moved out within the 10-year window. If that pushes them into a higher tax bracket, your legacy could lose some of its luster. The Tax Cuts & Jobs Act's lower tax rates are set to expire at the end of 2025, and it seems likely that taxes will increase in the coming years. You may want to take the money out of your IRA, pay the taxes on it now, and convert the money to a Roth IRA for your loved ones to inherit. That way, their RMDs will be tax-free. It is important to keep in mind that a Roth conversion is a taxable event and may have several tax-related consequences. Be sure to consult with a qualified tax adviser before making any decisions regarding your IRA.
If you're still working, you have more time to contribute to your traditional IRA.
The SECURE Act got rid of the maximum age for adding money to your traditional IRA -- as long as you're still working and earning income. The cutoff used to be 70½. (Roth IRAs and 401(k) plans have never had age limits on contributions.)
Why is this important? Because people are living longer, many are working longer. Now they can also save longer and build a more secure financial future.
Tax law changes can impact every aspect of your financial plan, both to and through retirement. That's why it's so important to work with a holistic adviser who incorporates tax, investment and estate planning into their practice. If you have a tax-deferred retirement account, your financial adviser already should have contacted you about the SECURE Act. If that hasn't happened, take the time now to set up a conversation.
Kim Franke-Folstad contributed to this article.
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