December 22, 2019 – The SECURE Act has been passed by the Senate and House and signed by the President. The bipartisan bill, Setting Every Community Up for Retirement Enhancement, has several key provisions that impact many of those who are currently retired as well as people planning for retirement.
Good news. The bill allows for people over 70 and one half who are still working to continue to contribute to regular IRAs – there is no longer an age restriction for making such contributions. Perhaps the most important provision is the one affecting people who will not have reached age 70 and 1/2 by December 31, 2019. The new law raises the age for taking Required Minimum Distributions (RMDs) from 70 and 1/2 to 72. These two provisions allow people who have not yet reached the age of 70 and 1/2 to achieve higher IRA and 401(k) balances for retirement if they are currently working and/or have enough non-IRA investment assets to defer taking IRA minimum distributions for an additional two years. This can provide for a higher likelihood of not outliving retirement savings. Unfortunately, if you were already 70 and 1/2 before 2020, you still have to take the RMDs required under the previous law.
The bad news. The bill eliminates “stretch IRAs”. Previously, non-spousal beneficiaries of inherited IRAs were required to take distributions over their estimated remaining life expectancy – now the amounts must be taken over a maximum of ten years. Regular IRA distributions are taxable, and beneficiaries may be at a high marginal tax rate, particularly if they are distributed over ten years. This makes regular IRAs less effective as a wealth transfer vehicle and makes Roth IRAs more appealing since Roth plan distributions can be structured so they are not taxable to beneficiaries.
More changes in the SECURE Act. There are a multitude of other changes in the new law. Small businesses now have tax incentives to set up automatic enrollment in retirement plans for their workers. They can now join multiple employer plans, banding together with other companies to offer retirement accounts to their employees. Annuities are now permitted as options within 401(k)s , which many people have lobbied for as an option for guaranteed income. There are other important changes for plans in the new law as well.
Bottom line. The new law is a big deal. The hope is that it will help shore up retirement for the nation’s citizens. It encourages companies to offer plans, and gives employees more options to save for the future. And if you are lucky enough to turn 70 and 1/2 after Jan. 1, 2020, you are going to be able to postpone RMDs for 2 years, helping preserve your retirement balances longer.
Comments? If you are not yet 70 and 1/2, will this change lead you to postpone taking money out of your retirement funds, or will go ahead and take money out before you have to at age 72? Also, does it affect your thinking about leaving money to your heirs via a 401(k) or IRA? Let us know in the Comments section below.