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SECURE Act for 401(k)s and IRAs Signed into Law: Good (mostly) and Bad News (for heirs):

Category: Financial and taxes in retirement

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.

Posted by Admin on December 21st, 2019

30 Comments »

  1. I have an inherited IRA but I never heard the term ‘stretch IRA’ till I read this article. I have had it since 2013. I have looked around on the internet and it seems I will be grandfathered and it will not affect me. Plus, it seems that if your inherited IRA is over $400,000 those are the people that are affected. That would also not apply to me. This new law takes effect Jan. 2020.

    From what I also read, it seems rich people do this for their kids purposely for them to inherit, now those who inherit the IRA’s will have to withdraw accounts over $400,000 over a ten year period. Some advisors are now saying it is more advantageous to buy a life insurance policy where the payout is tax free.

    The IRA I inherited was my Mother’s. I plan to make it last as long as I can by only taking minimum distributions I have to take by law.

    by Louise — December 22, 2019

  2. The plural of IRA is IRAs, no apostrophe needed.

    Editor’s comment. Good to know, thanks for the correction, now made.

    by Sandie — December 22, 2019

  3. Here is the question of the day, will this new law change how you take distributions from your IRA or 401(k)? Any effect on your thinking about using them to distribute money to your heirs? And lastly, do you think companies should have automatic enrollment in their 401(k) plans? Let us know in the Comments section.

    by Admin — December 23, 2019

  4. What is the method I need to use to leave my IRA to my spouse that does not have an IRA?

    by Robert — December 23, 2019

  5. This article explains inherited IRAs.

    http://news.cchgroup.com/2019/08/21/secure-act-stretch-ira-changes/news/tax-headlines/

    by Louise — December 23, 2019

  6. To Robert
    No method needed.
    Just list spouse as beneficiary.

    by Roger — December 24, 2019

  7. I will turn 70-1/2 by December 12, 2020. Will I be under new rule or old rule? I have seen contradicting information.

    by Lou — December 24, 2019

  8. Companies should automatically enroll employees into 401Ks. Especially if the company does not have a defined pension plan.

    by Ralph — December 24, 2019

  9. Ralph, in addition to companies enrolling employees in 401k plans, all public workers should be enrolled in their 401K equivalent plans and all self employed and those working for small businesses that do not have 401k plans should need to set up IRAs. I am not a fan of the gov mandating this sort of thing but there are so many people with no financial sense or who do not prioritize saving for their retirement until they are a year or two away for it in this case it would make sense. Ideally, that could be a first step in phasing Social Security out and replacing it with mandatory but self directed retirement plans.

    by jean — December 25, 2019

  10. Lou, the way I see it you come under the new law. It affects people who will not have reached age 70 and 1/2 by December 31, 2019. The company(s) that manage your IRAs or 401(k)s will be sending you info once you are affected. Anyone else have a different view?

    by Admin — December 25, 2019

  11. Admin, believe you are correct. I paid close attention to that change( and date) since my birthday is August 18th. That means I managed to beat the deadline by two months!
    Hooray…..I’ll take it.
    But…but….but…. here’s hoping everyone developed the political courage to address Social Security’s looming problems!

    by Doc Stickel — December 26, 2019

  12. Doc, thanks for confirming what I believed to be my situation. I too have a birthday in August so I believe I will be covered under the new law by 2 months. I definitely will be deferring my RMD. This will be a great win for my husband and I since he will not be covered, is already taking RMD. It will reduce our tax impact greatly and help us stretch our retirement finances.

    by Priscilla — December 26, 2019

  13. I’m just curious if they’ll up the percentage required of the RMD at the start to make up for the two year delay. Time will tell.

    Editor’s comment. Good question Vicki. For now it looks like the IRS is going to continue to use the existing withdrawal schedule. However they did recently change their life expectancy tables, so it is very possible the withdrawal schedule will change too. For now, here is how to calculate how much you have to take out (but your financial provider will figure this for you).
    1. Your IRA/401(k) balance as of Dec. 31
    2. If age 70, divide by 27.4
    3. If age 72, divide by 25.6.

    Example for person age 70. Balance is $250,000. Divide by 27.4 = $9124 RMD
    For person age 72. Balance is $250,000. Divide by 25.6 = $9765 RMD

    by Vicki — December 26, 2019

  14. for non-spouse beneficiary we designated a see through trust, not sure if this will be exempt from the 10 year rule?

    by Bob — December 26, 2019

  15. Regarding the question of whether companies should compel employees to participate in a 401K plan, I think it’s a good idea, as long as the 401K is well diversified. Prior to 2008, executives of a certain large bank that required a bailout from the government, were required to have all their 401K assets in company stock. Sales of the stock led to questions about why such action was taken. Needless to say, 401K values plummeted with the downturn. As they say, don’t put your eggs in one basket.

    As for the comment about replacing Social Security with private self-directed plans, I really hope that never happens. Too many people would wind up with even less than they would get under Social Security. Few people have the sophistication to direct their own investments, and many people don’t want to pay for management fees. I know I mostly recovered from 2008, but there were some harrowing moments. Some people left the market out of fear and went to overly safe investments. The numbers of destitute retirees could skyrocket.

    by Barbara — December 26, 2019

  16. Excellent, enlightening, educational information, this is great for those individuals who are scheduled to begin their RMD this year. Differing it to age 72 allows you to increase your savings, however, remember that the government gives nothing for “free”, so don’t spend those extra dollars just yet for they may very well increase the annual withdrawal , in my case from 4% to say 5% to 6%. Correct if I’m misinformed, please. Those are just my suppositions. Thanks for this for this very valuable information.

    by Norma — December 27, 2019

  17. I had planned on leaving the balance in my 401K to my kids, so they could roll it over into their own 401Ks. I understand why the government is doing this & I even admit it’s a good thing — but it will screw up taxes for my kids. Presumably they will be in their prime earning years & paying high taxes at a high rate when they are forced to take distributions from their share of the 401K/IRA they inherit from me. Same question as Bob — has anyone already started looking at whether trusts or other mechanism might ease non-marital beneficiaries’ pain?

    by Kate — December 27, 2019

  18. Admin. I am very confused with the life expectancy numbers you presented. I have an inherited IRA and just yesterday I saw a life expectancy table that doesn’t seem to agree with the numbers you presented. Here is the table I looked at: https://www.irahelp.com/printable/2019-single-life-expectancy-table-0

    You gave the example of a 70 year old person would use the Life Expectancy Factor (LEF) of 27.4 and age 72 LEF 25.6.

    The attachment I have provided says:
    LEF at age 70 is 17.0
    LEF at age 72 is 15.5

    I also have a question that I have not seen an answer for. I have an inherited IRA from my Mother. If I should die before my husband, is he eligible to inherit an inherited IRA? Would he be able to continue to take Required Minimum Distributions each year or would he have to withdraw a lump sum?

    Editor comment: We used the IRS Uniform Lifetime Table provided by Vanguard. See https://personal.vanguard.com/us/insights/retirement/estimate-your-rmd-tool It is the factor used by IRS in determining your RMDs, although they are in process of revising that.

    As for your inherited IRA, my guess is that if you have named your husband as the beneficiary he could take RMDs. But you should check with your tax professional.

    by Louise — December 27, 2019

  19. Doc, I’m not sure I understand what you mean by saying that with your birthday on August 18, you beat the deadline by two months.

    by Clyde — December 27, 2019

  20. Clyde, as I read the regs on the Secure Act, it states: for anyone NOT reaching the age of 70.5 by the end of 2019, the new date for beginning an RMD will be 72, as opposed to 70.
    By virtue of me turning 70 on this past August 18th, I will not be 70.5 until March, thereby sneaking underneath the threshold.
    So….According to Barron’s and Forbes , seemed like I just made it?
    I’ve read various stories on these new changes, and many don’t mention the nuance of 70.5 by 2019. Creating, I believe, some confusion.

    by Doc Stickel — December 28, 2019

  21. This seems like a very positive development all of the way around. Glad I can wait 2 more years before I have to take my RMDs – 2 more years of earnings that don’t get taxed. Helping companies make it easier to set up 401(k)s seems like a solid idea. And although the heirs won’t like it, it seems fair that they have to take a quicker distribution of retirement assets. A rare law that seems to make sense all around – and it was bipartisan. We could use more of that!

    by Ken — December 29, 2019

  22. Ken, I have an inherited IRA and I am grandfathered. I will be able to continue distributions for the rest of my life. You are right. I would have NOT liked it one bit had it affected me. Personally, I don’t see how it is fair to force heirs to deplete something that will help them during retirement. We have enough Senior citizens that are barely surviving on just a SS check. Regardless of time, the government will get the tax money. Just another example of big government with their hands in our pockets. They keep moving the Social Security eligibility age up and keep telling us to work longer. Employers don’t want to hire OLD people and try to dangle carrots on sticks to make us leave the workforce. If they can’t entice us to leave with a package, they come up with excuses like reorganization, reapplying for your position, downsizing. So, we can’t work longer in most cases due to job loss, we can’t get our full SS till we are old and we can’t hang on to our inherited IRA. How many times have you seen a vibrant company put an old person let’s say 66 years old on the payroll. I am not talking consultant but a full fledged employee with benefits full time? Almost never!

    On the other subject of automatically enrolling employees in 401k, I think that is a good idea. However, I do believe that a letter should be sent to the employee stating the fact that on a certain date they would be enrolled unless they sign the form to opt out. Some people have other saving choices or ideas.

    by Louise — December 30, 2019

  23. I am planning on taking my RMD to fully fund my children’s Roth. Any downside to this plan?

    by Lou — December 30, 2019

  24. Louise, I agree. I see 2 issues with what Congress has done with the inherited IRA. Retirements increasingly depend on savings and investments, with pensions becoming less and less common. As you correctly point out, vehicles that allow folks to have more assets available for retirement should be encouraged, not discouraged. The other issue I have is that there are many folks whose estate planning depended on the so-called “stretch IRA”. They spent decades legally and within the established rules funding and building assets so they could pass it along to their heirs. There was no allowance in the new law for transitioning to the new system or grandfathering IRA assets that have been accumulated for heirs but have not yet been inherited. It’s not fair to suddenly change the rules in the middle of the game. It’s putting folks who may have spent many years planning how to best transfer their estate to their heirs in the untenable position of either considerably decreasing the growth potential of the assets, or making sure they die by Tuesday.

    by Partagas — December 30, 2019

  25. “I am planning on taking my RMD to fully fund my children’s Roth. Any downside to this plan?”
    Lou – They would need to be able to prove earned income at least equal to the Roth contribution. You can gift up to $15k annually to any number of individuals if you wish, anyway.

    by Peder — January 1, 2020

  26. I have a different point of view about the “fairness” of taking away stretch IRAs. The purpose of the IRAs and 401(k)s was to encourage retirement savings. Yes, they could be used for estate planning purposes but that was not the point of the law. We all get a great tax break in our lifetimes from these tools – on IRAs and regular 401(k)s we don’t have to declare the money going into them as income, and for all those years before we take it out the earnings accumulate tax free. Only when we take the money out is it taxable (except for Roths which, funded by after-tax contributions are never taxable). It seems only fair that the period heirs have to take out the money should be shortened, particularly if it helps pay for more retirees to get a break on their plans (delaying 2 years before required RMDs). There are lots of other, stronger ways for people to do their estate planning, particularly since only very large estates have to pay taxes anyway. You can just give your heirs the money outright, unless you are very wealthy they won’t have to pay federal taxes on it. Anyway, that is my take on it – it is OK to balance out the plan by favoring retirees rather than heirs.

    by Admin — January 1, 2020

  27. Admin, you do make a good point about the intent of IRAs, 401k’s etc. being to provide a more secure retirement for the working person. The intent was for people to use this money to fund their retirement, not stash it away for future generations. However, for a child inheriting their parents IRA if it is large enough it could have serious tax repercussions for them if they must withdraw the money within 10 years. Under the old rules the government still gets their tax money, the child still has to withdraw money each year, they just could do it over their lifetime and as another commenter noted potentially use it to supplement their own retirement. I really think the government just wanted to accelerate the amount of tax revenue it receives rather than have the taxes come in over a much longer period and in lesser amounts.

    I fall under the new age 72 rule as my birthday was in October and I turn 70 1/2 in 2020. But, I may just start taking some money in 2020 anyway rather than delaying another year.

    by Leonard — January 2, 2020

  28. Can retirees – after full retirement age – add to their Roth accounts or roll regular IRA funds into their Roth account (after paying the taxes?) This would seem to be the best way to leave money to our children. Just list them as beneficiaries on the Roth account. They would never have to withdraw the funds on a required basis or pay tax on the earnings in there. (Am I right about this?)
    That way, the retiree will always have access to his funds as needed in the Roth. It’s tricky to give money away to your kids prematurely because you never know what long term care or other costs may arise. And that way, when you do pass away, your beneficiaries will inherit the Roth (and won’t that be tax free for them?) Not sure…

    by Cindy — January 3, 2020

  29. Cindy, Just as the rules for traditional IRAs have changed the rules for Roths can be adjusted at anytime by congress. If there is a large estate why not work with a good planner to figure out how to shelter the $.

    by jean — January 4, 2020

  30. Cindy, your thoughts are correct. Regular IRA assets can be rolled over to a Roth IRA after retirement, so long as you pay income taxes on the amount rolled over. Anything in a Roth IRA then comes out free of income tax when you or your heirs who inherit it withdraw it. Also, any growth through investment performance in a Roth IRA is not taxed. It’s, of course, best to make the Roth IRA rollover in a year(s) when your income taxes may be lower. You should consult with your professional tax or financial advisor as to what is best for your situation.

    Except for such an IRA rollover, you can’t contribute to a Roth IRA unless you have earned income in the year you want to make a contribution to the Roth. People over 50 are allowed to contribute up to $7,000 in earned income in 2020 while those under 50 may contribute up to $6,500. But you can do this at any age, subject to having earned income and keeping the contribution under annual limits, which usually change each year.

    Also, if you are 70 1/2 or above, you should usually make any charitable contributions from your IRA using the Qualified Charitable Deduction (QCD) technique. This will almost always effectively reduce the amount of tax you pay on your IRA Required Minimum Distribution each year, especially if you don’t itemize deductions. Again, consult with your tax professional.

    by Clyde — January 4, 2020

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