If you’re nearing retirement or already retired, you may have heard rumblings about something called the SECURE Act and wondered if its provisions could impact the savings, withdrawal and legacy strategies you currently have in place.
Now that the Setting Every Community Up for Retirement Enhancement Act of 2019 is the law, with most parts effective as of January 1, 2020, we know the answer is yes—your retirement plans will likely be affected, and you may see both pros and cons. Now is a good time to review the new rules with a financial professional and talk about how you might adapt your plans for the future.
What Are the Biggest Changes?
Here are three major ways the SECURE Act could affect you:
- You Can Leave Money in Your Retirement Accounts a Little Longer. Until now, if you were retired and had savings in a tax-deferred retirement account (a traditional IRA, 401(k), 403(b), etc.), you were required to take minimum withdrawals starting at 70½. The SECURE Act bumps the age for taking those required minimum distributions (RMDs) to 72. This change gives savers who hadn’t turned 70 by the end of 2019 more time to grow their money before they have to worry about RMDs—and the taxes on those distributions.
- You’ll Have More Years to Contribute to Your IRA. The SECURE Act eliminates the maximum age (formerly 70½) for contributing to a traditional IRA if you have earned income. Which means that now, should you choose to continue working into your 70s—either full- or part-time—you can keep stashing money in your IRA for when you do decide to retire. (Roth IRA and 401(k) plans have never had age limits for contributions.) So, for example, even if you’re over 70½, you can put $7,000 in your IRA this year ($6,000 plus a $1,000 catchup contribution), or $14,000 if you’re married—an investment that could go a long way if, like the average American couple, you and your spouse live into your mid-80s.
- You’ll Have to Rethink Any Plans for a “Stretch” IRA. In the past, beneficiaries could take distributions from an inherited IRA based on their own life expectancy and “stretch” out their withdrawals and the required tax payments for decades. The new law removes this provision for beneficiaries of IRAs as well as 401(k)s and other defined contribution plans. Most beneficiaries now will have to withdraw the funds and pay the taxes within 10 years of a loved one’s death. (The change doesn’t affect spouses, beneficiaries who are disabled or have a chronic illness, minor children or individuals who are within 10 years of the age of the deceased. It also doesn’t apply to those who inherited an IRA prior to 2020.)
What Can You Do to Adjust?
These are just a few of the many changes in store now that the SECURE Act is in place. The law is long and complex, and there are still some bugs that need to be worked out. But there are steps you can take now to make sure your financial plan remains aligned with your goals:
- Prioritize RMD Planning. Managing your RMDs is an important part of retirement income and tax planning. You should have a strategy for which accounts you’ll withdraw from and when, and how those withdrawals will impact your taxes and retirement benefits, including your Medicare premiums.
- Review Beneficiaries. Make sure the beneficiary designations on retirement accounts are up to date and remain consistent with your goals. If your aim was to provide lifetime income for a child, for example, you’ll probably have to work out a different strategy. If you set up a trust as your beneficiary, check the language to be sure it still suits your needs. You’ll also want to ensure your legacy doesn’t become a “tax time bomb” that could push your adult children into a higher tax bracket during their highest earning years.
- Consider converting funds to a Roth IRA. Moving money to a Roth account now could lower tax bills for you and your loved ones in the future, and the SECURE Act gives you more time to get it done before RMDs begin.
As with all things related to retirement planning, taking a proactive approach is key. At WealthBridge, we can help you make a plan or adjust the plan you already have. To learn more, contact us to learn more about how you can take advantage of the new law.