The Secure Act

Written by Philip Lockwood

The Setting Every Community Up for Retirement Enhancement Act, better known as the SECURE Act was signed into law by the President on December 20^th, 2019. The SECURE Act makes numerous changes to retirement as we know it. For starters, the required minimum distribution (RMD) age is increasing from 70 ½ to 72. This is a big change as it allows investors to have another year and a half to build retirement accounts for those who were under age 70 ½ by 12/31/2019.

The SECURE act also makes it easier on new parents and those who would like to become new parents.  The Act will allow them to withdraw up to $5,000 from their retirement plans to cover expenses related to a new baby or adoption without the 10% early withdrawal penalty. It also allows withdrawals of as much as $10,000 from 529 education-savings plans for repayments on student loans. .

My client base is going to be the most interested in the Age 72 RMD withdrawal and the removal of the stretch IRA. With that being said let’s first focus on the age 72 RMD withdrawal.

The new SECURE Act RMD rules only apply to those individuals who turn 70 ½ in 2020 or later. So even though an individual turning 70 ½ on December 20, 2019 will not yet be 72 in 2020, they will still be required to continue RMDs under the existing rules, and to take an RMD for 2020 (and each year thereafter)

One of the biggest changes the SECURE Act presents is eliminating “Stretch IRA’s” for non-spouse beneficiaries. The Act will no longer allow non-spouse beneficiaries who inherit a retirement account to “stretch” out distributions over the beneficiary’s life when liquidating the account. Liquidations are required within 10 years of the newly inherited account, which inevitably will increase taxes and decrease the value of the Inherited IRA. There are some exceptions to this however, such as when the beneficiary is a surviving spouse, disabled or chronically ill, not more than 10 years younger than the deceased IRA owner, or a child who hasn’t reach maturity age

To some of my clients this delay of RMD withdrawal will give them further opportunity to continue with their conversion from Qualified Accounts (Traditional 401k and Traditional IRA’s) to Roth IRA’s. This can be more important than ever as we look at a majority of non-spousal beneficiaries.

It is my belief this restriction on the Stretch IRA brings to light the importance of advance tax planning. Now that this Bill has passed the need for tax diversification (including Roth IRAs) and creative tax planning could be at an all-time high. These strategies include Roth conversions, distribution planning, beneficiary changes, and tax bracket management. Decreasing Traditional IRA balances in favor of Roth IRAs (when possible and personally appropriate), may be a huge benefit to beneficiaries who inherit an IRA.

Any individual with an IRA balance over $500,000 who is interested in leaving an inheritance to their children and has concerns about these changes can take action by scheduling a comprehensive review with our office.

Be on the lookout for an example of how the SECURE ACT can impact your retirement in next week’s Facebook post.

Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.