Updated: May 22, 2020
The SECURE Act had stalled until lawmakers tacked it onto a spending bill at the tail end of the year. The House passed the legislation, and President Donald Trump signed the bill into law in late December, 2019. “People need to save as much as possible, and this clears away some of the hurdles to make that happen,” says Michael Townsend, Vice President of legislative and regulatory affairs at Charles Schwab.
Here are three things to know about the legislation:
1. RMDs Start at Age 72, not 70½
The new law pushes the age at which you must start withdrawing money from your traditional retirement accounts from age 70½ to age 72. This only applies if you turn 70½ in 2020. Those who turned 70½ in 2019 should not interrupt their RMDs but keep them as scheduled under prior rules. Townsend encourages talking with a tax advisor or financial consultant about any questions because these rules can be confusing, and penalties are significant. Those who turn 70½ in 2020, are subject to the new rules and have an extra year and a half before they start withdrawals. This becomes helpful because it delays the point where Uncle Sam finally gets at his share of your retirement savings that have been growing tax-free for decades. Retirees that need the money from their retirement accounts to live on are already withdrawing a portion and paying taxes on it before the government requires them to do so. But delaying the withdrawals helps grow your savings.
2. You Can Contribute to Your Traditional IRA After Age 70½
If you are 70½ and still working, the SECURE Act allows you to continue to make contributions to your traditional IRA. The old law did not permit contributions past that age whether people continued working or not. So rather than simply delaying receiving RMDs, this provides opportunity to grow your account. And since more and more people are working past traditional retirement age in some capacity, making these IRA contributions boosts savings accounts and provides tax deductions.
3. You’ll Have to Pay Taxes on Inherited IRAs Sooner
Another significant change affects people who inherit retirement accounts. This represents a significant implication for estate planning because the new law eliminates the “stretch IRA.” In the past, IRA beneficiaries could “stretch” their distributions from the inherited IRA over the course of their lifetime. They would pay taxes on those distributions but beyond the RMDs, but the beneficiary could keep the remaining assets invested in the account if they wished. But the new law requires most beneficiaries to withdraw all the assets within 10 years (exceptions include spouses, minor children, and those chronically ill or disabled). This could represent significant tax liabilities. Townsend advises investors with estate plans that include IRAs to review their arrangements in light of the new law.
There are other changes, but these three all affect investors with IRAs and passage of this new law may present a good reason to talk with your financial advisor. At Brixton Capital Wealth Advisors, we are happy to meet and discuss your specific situation.