The SECURE Act and Your Retirement
Get ready for some good and some not-so-good changes
Here in the retirement planning world, the December passage SECURE Act has been a pretty big deal. This isn’t surprising given that the bill was intended to help more Americans benefit from various retirement vehicles, including Individual Retirement Accounts (IRAs).
Here are a few highlights that might pertain to you:
The good
RMD age increased to 72 (as long as you didn’t turn 70.5 in 2019)
Required minimum distributions are the bane of many retirees and the focus of much of our retirement planning for clients who are in their 60s. The SECURE Act increased the age where account holders must take taxable distributions by 1.5 years. For planning purposes, that gives us additional time to implement Roth conversions on behalf of our clients: a clear win. Note that the new RMD age limits only apply to people who didn’t reach 70.5 years in 2019.
Age limits eliminated for IRA contributions
The first thing I did when I heard about this provision of the SECURE Act was to call my 81-year-old father who still works part-time as a geologist. For more than a decade, sheltering any part of his earned income in an IRA was off-limits. But not anymore. “Pay income tax if you want to, Dad,” I told him. “But you probably won’t have to.”
The not-so-good
A new 10-year window for Roth IRAs (and on Stretch IRAs in general)
We have long favored Roth IRAs not just for their tax-free gloriousness, but also for their utility in estate planning: A person other than a spouse inheriting a Roth IRA could roll them over into an Inherited Roth IRA and then take distributions from the IRA throughout their lifetime. Not too shabby, given that the money inside Roth IRAs grows tax-free. Now, however, all the money must be distributed within 10 years. That still gives the heir some wiggle room, but the tax treatment of inherited Roth IRAs is far less generous than it was: For example, before the rule change, a 50-year-old child could “stretch” the money into RMDs over his or her expected lifetime, or roughly 30 more years. Now, the heir must take all the money from the IRA by the time they reach age 61.
The new rule does not require the non-spouse beneficiary to take withdrawals during the 10-year period. But all the money must be withdrawn by the end of the 10th calendar year following the inheritance.
Other than surviving spouses of IRA owners, more latitude is given to disabled or chronically ill people, individuals who are not more than 10 years younger than the IRA owner, and children of the IRA owner who have not reached the age of majority.
A few other salient changes
The SECURE Act is also changing employer retirement plans. Some key changes are:
Part-time employees will have better access to employer retirement plans.
Employers will get tax credits for creating retirement plans for their employees.
Employers will have an easier time including annuities in their plans.
Annuities are not our favorite; they often perform poorly and they are typically expensive, restrictive and lack transparency. Ergo, many planners are not enthusiastic about this change.
For more information about 2020 tax limits, rates and schedules, click here.
If you have any questions about the SECURE Act and how it might impact you or your investment accounts, don’t hesitate to reach out to us. Likewise, if you are concerned about the allocations in your workplace retirement plan, bring them in and we’ll do a free, no-strings-attached allocation review and adjustment. To make an appointment, call 928-460-0972 or visit schedule.montoyawealth.com.