The SECURE Act stands for Setting Every Community Up for Retirement Enhancement. It was signed into law on December 20, 2019 and most provisions went into effect on January 1, 2020. Lawmakers mostly focused on enhancing options and eligibility for retirement plans. However, one significant change that may not be viewed positively is the elimination of the stretch IRA (for some types of beneficiaries). I will highlight a few key changes from this act that could impact you.
First, the age for required minimum distributions (RMDs) was extended to 72. Beforehand, RMDs began at age 70 ½. This is a great adjustment because it presents a longer period for tax planning prior to RMDs, when income is higher. For example, you could do more years of Roth conversions at a lower tax bracket. You have more time to harvest long-term capital gains at a lower tax cost. Note that if you reached age 70 ½ in 2019 and your RMDs already started, nothing changes for you.
Although the age for RMDs changed, the age for Qualified Charitable Distributions (QCDs) did not change. If you are age 70 ½ and charitably inclined, you can still make donations from your IRA and exclude the amount donated from your AGI (up to a limit).
As mentioned, a substantial modification from the SECURE Act is the treatment of inherited IRAs. Beforehand, it was possible to stretch out distributions from an inherited IRA over the lifetime of the beneficiary. This is usually referred to as a stretch IRA. Now, inherited IRAs must be distributed in 10 years, unless the beneficiary is: a spouse, a minor child, disabled, chronically ill, or the beneficiary’s age is within 10 years of the age of the deceased. What does this mean for everyone who doesn’t fall into the listed categories? It means that beneficiaries might have to pay more in taxes because the distributions could push them up into higher tax brackets (there are fewer years to make distributions so distributions will be larger). If a stretch IRA was part of your estate plan, we encourage you to come see us and possibly, your estate planning attorney. Depending on your goals, there might be a better strategy available.
Here are a few more positive changes from this act. There is no longer a maximum age for contributing to an IRA – as long as you or your spouse are still working. If you are a graduate student, the definition of compensation was expanded so that you can save more easily for retirement. Lastly, beginning in 2021, if you are a part-time employee, you will have greater access to a 401(k) through your employer.
Contact us to find out more about the SECURE Act and how it may be relevant to your financial situation.
Hannah Szarszewski is a Certified Financial Planner(TM) professional helping clients with retirement planning and other financial issues. To learn more about her background and the Keener Financial Planning approach, please visit the Interview Hannah page.