The SECURE Act — formally known as the “Setting Every Community Up for Retirement Enhancement” Act — is designed to help people better use retirement savings and save more. However, it also has some big tax implications related to leaving behind an estate.
It is important that you are aware of these changes and you probably ought to use the NewRetirement Retirement Planner to evaluate the implications to your own retirement finances.
The Secure Act increases the age after which you must begin taking Required Minimum Distributions (RMDs). Until now you had to start RMDs at 70 1/2. Now you can wait until you are age 72.
The benefit is that you now have additional time to allow your tax deferred savings to grow without being depleted by distributions and taxes.
However, it is important to note that this favorable development only applies to people who reach 70 1/2 after 2019. So, if you turned 70 1/2 in 2019 or earlier, you’re unaffected.
And, as under prior law, if you’re still working after reaching the magic age and you don’t own over 5% of the company, you can postpone taking RMDs from your employer’s plan(s) until after you’ve retired.
NOTE: The NewRetirement Planner has been updated with the age change for RMDs. If you are currently under 70 1/2, you can log in and see how your plan has changed with the new law. You may want to pay particular attention to income and tax implications.
While most of the Secure Act changes are positive, there is a lot of grumbling about changes for inherited IRAs.
Up until now you could leave behind an unused portion of your IRA to your children and grandchildren and, because they have a longer life expectancy, the taxable RMDs could be spread out over a very long period of time.
This strategy was often called a “stretch IRA” because you could stretch the distributions over a younger person’s lifetime.
However, the SECURE Act requires that most non-spouse IRA and retirement plan beneficiaries use the inherited accounts (withdraw all money) within 10 years of the account owner’s death.
This change impacts the fortunes of heirs and the estate goals of IRA owners. You may want to review your beneficiary designations on all accounts.
NOTE: Exceptions to the 10-year rule include assets left to a surviving spouse, a minor child, a disabled or chronically ill beneficiary, and beneficiaries who are less than 10 years younger than the original IRA owner or 401(k) participant.
If you are under 70 1/2, the SECURE Act gives you two additional years to do Roth conversions — delaying or further spreading out the tax impact.
And, if you intend to leave behind tax advantaged accounts as part of your estate, a Roth conversion might make even more sense since the distributions (which now must be made by your heir within 10 years of your death) would be tax free.
Learn more about Roth conversions or model one in the NewRetirement Planner.
Let’s face it, more of us are working long past the age of 62, 65 and even 70. President Trump (73), Senators Sanders (78) and Warren (70), Bill Gates (64), Mick Jagger (76) and Warren Buffet (89) are a few notable examples!
Good news, you can now continue to contribute to your traditional IRA past the age of 70 1/2 if you are still working. This change takes effect for contributions in 2020.
Use the NewRetirement Planner to see what happens to your financial future if you work longer and contribute more to savings.
The SECURE Act makes it easier for employers to offer annuities as an investment option in their employer sponsored 401(k) plans. And, there are new regulations about disclosures related to lifetime income. Employers will provide statements that show how much money you could potentially receive each month if your total 401(k) balance were used to purchase an annuity. This could make it easier for you to gauge what your potential income would be throughout retirement.
And, it is now easy to roll over lifetime income investments to other 401(k)s or IRAs.
You can use the NewRetirement Planner to model an annuity as part of your retirement plans.
Up until last year, if you worked less than 1,000 hours per year (around 20 hours a week), you were not eligible to participate in your employer’s 401(k) plan.
According to the Bureau of Labor Statistics, this was particularly damaging to women who are twice as likely to be part-time workers than men. (Learn more about the challenges for women and retirement.)
Now people who work for an employer who maintains a 401k plan can participate if they work more than 1,000 hours in one year or 500 hours over 3 consecutive years.
There are a couple of changes that benefit parents — one for new parents and another for parents whose children are old enough to have college loans.
- New parents can withdraw up to $5,000 penalty-free from their retirement plans upon the birth or adoption of a child.
- 529 plans can now be used to pay down student loan debt, up to $10,000.
A couple of SECURE Act provisions make it easier for small business owners to provide retirement plans.
The Act:
- Makes it easier and less risky for small businesses to join a Multiple Employer Plan (MEP). MEPs are purported to deliver low cost, high-quality retirement plans.
- Provides tax credits to small businesses for starting a retirement plan — up to $5,000
Many of the SECURE Act changes can be modeled in the NewRetirement Planner and the system has already been updated with the age change for RMDs.
See how your future finances have changed!
