It seems like the only constant in life is change.
Last December, President Trump signed The SECURE Act1 as part of the year-end 2019 spending legislation.
The SECURE Act – “Setting Every Community Up for Retirement Enhancement” – shifts the existing rules on retirement saving and distributions, for both account owners and their beneficiaries.
As happens often with tax legislation, there are some people who may benefit from the changes and others who may view the changes as detrimental. We’ve highlighted some of the more significant modifications within the Act that affect your retirement planning:
- The SECURE Act extends the current required minimum distribution age from 70½ to 72
If you turned 70½ in 2019, you must begin taking a minimum distribution from your IRAs and other retirement accounts no later than April 1, 2020. In a nutshell, if you reached age 70½ in 2019 or before, you must continue taking at least minimum distributions from IRAs or retirement accounts. For this group of retirees, there are no changes to the distribution rule.
The change comes into effect if you will turn 70½ in 2020 or later. If you are in this age group, you can wait until age 72 to begin taking distributions from your IRAs or other retirement accounts.
The SECURE Act allows individuals who don’t want or need the income from their retirement accounts to delay taking these distributions, and delay paying taxes to Uncle Sam. Statistically, this provision may help the 20% of retirees who take only the minimum amount required. The remaining 80% of retirees take out more than the IRS-required minimum.2
Interestingly, the SECURE Act still allows anyone who is 70½ to make Qualified Charitable Distributions from IRAs and avoid having the distribution count as taxable income.
- The SECURE Act allows IRA contributions after age 70 if still employed
Many Americans are delaying retirement longer than ever. As of February 2019, the Census Bureau reported that about 20% of Americans over age 65 – more than 10 million people – were either working or looking for work, representing a 57-year high.3
The SECURE Act allows anyone who still earns income from employment, or is married to a spouse earning income, to contribute to an IRA after age 70½. Traditional IRAs had been the only retirement account that did not allow contributions to be made after age 70½.2
- The SECURE Act eliminates “Stretch IRA” benefits for some beneficiaries
Until now, when IRA owners passed away, their beneficiaries could take distributions from those IRAs over their lifetimes. By doing so, they could allow the IRA funds to grow tax-deferred and potentially stretch out the tax liability over their lives.
Under the new legislation, when IRA owners die (any time in or after 2020), most non-spouse beneficiaries must fully distribute the IRA balance within 10 years following the year of inheritance. (The prior IRA distribution rules remain unchanged for any beneficiaries of IRAs whose original owner died prior to January 1, 2020.)
There is some flexibility, in that IRA beneficiaries who inherit this year and going forward could choose to distribute at any time during their 10-year window. Exceptions also may exist for spouses, minor children, or those with special needs or chronic illnesses.
As always, we at SJS stand ready to listen and work with you and your other professional advisors to guide you in understanding how these changes may affect your plans for the future. Please give us a call – we’re here for you, and happy to help!
SJS Investment Services does not provide tax advice. Please consult your tax professional for specific advice. This material has been prepared for informational purposes only.
1 “The SECURE Act.” Chairman Richard E. Neal, House Committee on Ways & Means.
2 “SECURE Act and Tax Extenders Creates Retirement Planning Opportunities and Challenges.” Michael Kitces, www.kitces.com. December 23, 2019.
3 “Millions of Americans are Working Past 65, and It’s Not Because They Can’t Afford to Retire.” Tanza Loudenback, Business Insider. April 29, 2019.