The SECURE Act, which was signed into law in December 2019, is the biggest piece of retirement legislation from the last decade. If you are nearing retirement or already retired, these changes will impact you!
In today’s video, I’m discussing the 3 key areas of the SECURE Act. You’ll learn about:
- The new Required Minimum Distribution age
- How you can make IRA contributions past age 70 ½
- And probably the most impactful, timeline changes in the Stretch IRA Distributions For Inherited IRAs!
Click here to watch the full video or read the full video transcript, below.
HOW THE SECURE ACT WILL CHANGE YOUR RETIREMENT
SECURE Act Provision 1: RMD Age Increases
One of the main provisions around IRAs and 401k accounts is that you no longer have to start taking your required minimum distributions at age 70 ½. You can start taking them at 72.
Here’s why this is beneficial. Let’s say you retire at 65 and you are taking money out of your individual accounts, your non-IRA accounts to support your lifestyle and income needs in retirement. Before you take your required minimum distributions, your income’s probably going to go down. And that’s a big deal because it opens this longer window between retirement and the drop of your income and when you have to start taking those required minimum distributions.
It’s important in that window, that you look seriously at Roth conversions in your IRA accounts and see if that makes sense for you. Because if it does, if you’re able to convert money to a Roth and not pay a boatload in taxes for doing so, there’s more of an opportunity there to do that. It lowers the total amount that’s in your IRA account, that’s now shrunk.
Therefore, when you turn 72 and you have to start taking those RMDs, the mandatory amount is now based on a smaller amount. This means that you potentially lower the taxes on future withdrawals by not having to start as early and by taking advantage of some other opportunities that exist there.
SECURE Act Provision 2: Contributions Past Age 70 ½
The second piece of this secure act that I think is going to be wide sweeping is that you can continue to make contributions to your IRA account after age 70 ½, if you’re still working. You used to have to stop at age 70 ½, no matter what, even if you were still working. However, as we all know, a lot of us can work into our 70’s and a lot of people will work into their 70’s. The beauty of this is, that if you are still working, you can contribute to an IRA.
The other reason why this is relevant is that it cleaned up the rules around the differences between 401k rules and IRA rules. In the 401k, you’ve been able to continue making contributions past age 70 ½ as long as you were still working. But then the rules for the IRA accounts, which is a very similar account type were different.
SECURE Act Provision 3: Accelerated Stretch IRA Distributions For Inherited IRAs
This is probably the biggest piece of the SECURE Act that’s going to impact the most people. Let’s say you have a large IRA and you die and it goes to your spouse. Your spouse then withdraws money and at some point, he or she dies while there’s still a lot of money in the account. For most people, the beneficiary is their kids. Under the new rules, your children will only have 10 years to fully distribute and cash out the IRA account.
Here’s the problem with that. Most people end up inheriting money in their peak earning years. Let’s say you inherit a half million-dollar IRA. You now have 10 years to fully distribute and pay taxes on a half million dollars. You’re potentially increasing your taxable income by $50,000 a year.
This has a tremendous impact on the taxation and estate planning piece of it. If you have a large IRA ($500,000 or more), it would be very wise to talk to your tax advisor and/or your estate attorney. There are strategies and things you can do to minimize the tax impact.
Another strategy to consider if you have IRA assets along with other assets, is to give the child with the lower income the IRA assets. It’s not going to impact them as much. Give the other child with the higher income, the taxable account assets. There are ways when you work with your tax advisor and your estate attorney to figure out how that all balances out.
It’s my understanding that if you have an existing inherited IRA, you are still allowed to stretch the distributions over your remaining life, you’re grandfathered in. For the new rules to apply, the primary account owner of the IRA would have to have died on January 1st of 2020 or later.