How Will the SECURE Act Affect Your Retirement Planning?

The Setting Every Community Up For Retirement Enhancement (SECURE) Act’s most immediate impacts will be experienced by those nearing or already in retirement.

The SECURE Act makes significant changes in several key areas: 1) delaying the required minimum distribution (RMD) date for retirement plans, 2) removing the age limit for making Individual Retirement Account (IRA) contributions and 3) eliminating the “Stretch” IRA distribution option. These changes are summarized below.

Establishment of a New Required Beginning Date for RMDs
The SECURE Act establishes a new required beginning date for RMDs at age 72. Previously, the mandatory age for most retired individuals to start making withdrawals from a traditional IRA or employee-sponsored retirement plan was 70.5. Pushing back the RMD start date provides retirees additional time to allow their IRAs and 401(k)s to grow without being depleted by distributions and taxes. This new rule effects only those who did not reach age 70.5 by the end of 2019.

Removal of the Age Limit for Making IRA Contributions
In addition, the SECURE Act eliminates the 70.5 age limit for making traditional IRA contributions. Under the new law, the growing number of people working past this age can continue making either deductible or non-deductible IRA contributions indefinitely, allowing them to enhance their financial security in retirement. This means that a married couple past age 70 may contribute $14,000 to an IRA in 2020 (i.e., a maximum of $7,000 each), allowing them to receive a valuable tax deduction and save for the future.

Elimination of the “Stretch” IRA
Under previous rules, a young beneficiary could extend distributions from an IRA account over his or her lifetime. This enabled a person to extend the payout period from an inherited IRA over decades, which also spread the payment of income taxes over a longer period of time. However, one of the most significant provisions of the new law is the elimination of so-called “stretch” IRA provisions.

Now, if an owner of an IRA passes away and leaves the account to a beneficiary other than their spouse, the beneficiary will have only 10 years to distribute the entire retirement account. Exempted from this provision are surviving spouses, minor children, individuals within 10 years of age of the deceased, the chronically ill and the disabled. It is important to note that grandchildren are not included among these exemptions.

Other provisions in the SECURE ACT increase access to lifetime income options in retirement plans, and reduce costs associated with setting up retirement plans for small employers.

What steps should you take now that the retirement law has changed? Although it will take decades for the impacts of the SECURE Act to be realized, it is important to review your long-term financial plan, tax strategies and trust documents for anything that may be impacted by these changes. A qualified tax or financial professional can provide advice on what is best for your unique situation.

Pacific Federal is a subsidiary of Zenith American Solutions.