The SECURE Act and Your Finances
While you were busy celebrating the holidays, you might have missed the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in late December. Here a few of the key changes that might impact our clients:
RMDs Now Begin at Age 72
Before passage of the SECURE Act, individuals generally had to begin Required Minimum Distributions (RMDs) from their qualified retirement accounts (such as traditional IRAs and 401(k)s) by April 1 of the year following the year they turned 70 ½. The SECURE Act now allows individuals to wait until April 1 of the year after they turn age 72 to begin RMDs. Many individuals have to make withdrawals from their qualified accounts before RMDs begin to meet spending needs, but those who can wait will now be able to leave their account balances untouched for a longer period. It’s important to note that the previous rules apply to those who reached age 70 ½ by the end of 2019 and these individuals will have to take their first withdrawal before April 1, 2020. Here at the Family Firm, we ensure that our clients take RMDs properly and in line with their overall asset allocation.
New 10-Year Rule for Inherited Retirement Accounts
Beneficiaries of most retirement accounts belonging to an individual who died before the end of 2019 could generally stretch their RMDs from these inherited accounts using their own age and the government’s uniform life expectancy table. However, under the SECURE Act, most beneficiaries of accounts whose original owners die in 2020 and beyond (2022 and on for owners of government retirement accounts such as the Thrift Savings Plan) will have ten years starting in the year after the original owner’s death to withdraw the entire amount of the inherited account. Some beneficiaries (known as Eligible Designated Beneficiaries) to this rule can use the previous rules and include spouses of the deceased as well as beneficiaries who are disabled, chronically ill, or within ten years of the decedent’s age. The ten-year clock for minor beneficiaries who were the children of the decedent begins once they reach the age of majority.
Under the new rules, some beneficiaries might consider strategic withdrawals from the retirement account over the course of the ten-year period to prevent moving to a significantly higher tax bracket by taking a large distribution in the one year. The Family Firm’s advisors can also help our clients review their beneficiary designations to ensure assets will be distributed in a tax-efficient manner.
Ability for Those Working to Contribute to IRAs After Age 70 ½
Previously, individuals who were still working beyond age 70 ½ were not allowed to make contributions to IRAs, but under the SECURE Act these individuals will be permitted to do so. Individuals who are contributing to their IRA and making Qualified Charitable Distributions (QCDs) will need to consider the coordination rules for these transactions; our advisors can recommend alternatives, such as contributing to a Roth IRA, 401(k), or taking the QCDs from a spouse’s IRA.