Planning matters

5 Ways Your Retirement is About to Become More SECURE

As 2019 drew to a close, a bill was passed and signed into law that included some big changes for retirement savers. Known as the SECURE Act (Setting Every Community Up for Retirement Enhancement), it includes 29 provisions to increase access to tax-advantaged accounts and help prevent older Americans from outliving their assets.

With any legislation, there are pros and cons, depending on which side of the equation you’re on! Looking at things from our standpoint, here are the 5 aspects that will be most impactful to our clients:

Inherited IRAs must be withdrawn within 10 years, unless you inherit from a spouse. The old rules gave beneficiaries a much longer time to withdraw, which meant taxes could be spread out over their remaining lifetimes.  If you inherit an IRA from a non-spouse after 1/1/20, you’ve got just 10 years to take out (and pay taxes on) the whole thing.  Previously inherited retirement plans follow the old rules, nothing changes.

The maximum age for making IRA contributions was repealed. If you are over age 70.5 and still earning an income (from work or a business you own), you may make contributions to an IRA. Previously, you had to stop IRA contributions once you turned 70.5, even if you were still working.

You won’t have to start taking out Required Minimum Distributions (RMDs) quite as soon. The RMD age has increased from 70.5 to 72. If you turned 70.5 in 2019, you’ll still need to take an RMD in 2020. But if you don’t turn 70.5 until 1/1/20 or later, you won’t need to take out your first RMD until the year you turn 72. If you’ve already started taking RMDs, you must continue to do so, nothing changes. And if you have been thinking about sending your retirement plan distributions to charity to avoid tax, you’ll still be able to start doing so at the earlier age of 70.5, you won’t have to wait until age 72 to start making those tax-free donations from your IRA.

Non-tuition stipend and fellowship income will now be considered as compensation for IRA purposes. This means that grad students will be eligible to fund an IRA or Roth. The earlier people start saving for retirement, the better!

Employers must now show plan participants how much income their plan balance is likely to generate in retirement. Many people have unrealistic expectations regarding the amount their savings can create, or else they simply have no idea, so this is a change that should help folks better understand how they’re situated as they plan for their retirement years.

One other important update relates to the calculation of RMDs from retirement accounts. Beginning in 2021, the IRS is changing the life expectancy table in response to our longer lifespans. As an example, under the current table, a 70-year old has a life expectancy of 27.4. In 2021, the life expectancy will change to 29.1. The result of this minor adjustment will be a smaller amount of taxable withdrawal, over a longer period of time. Not a huge change, but a good one.

Given the scope of these changes, we expect many clients will be impacted in one way or another. Please contact your planner if you have questions about how your tax, estate or retirement planning may be affected.