SECURE Act Changes You Need to Know About
The SECURE Act is finally here and officially law now starting in January 2020. The bill has had wide bipartisan support for some time, and it was finally slipped into the December budget passing in late 2019 and became law.
There were a few major changes that will concern most retirees when it comes to their future planning and we are going to review two of them here.
Change #1: The Required Minimum Distribution (RMD) age changes to 72
Prior to 2020 the RMD age was 70 ½ years old. Which meant that if you were 70 ½ years old in 2019 or prior you would need to continue taking RMD’s every year and the new law DOES NOT affect you. However, if you did not turn 70 ½ until 2020 or later then you are in luck and you do not need to start taking RMD’s until the year in which you turn 72! If you do not need the income from your IRA account this means that you potentially get an extra two years to keep the funds growing in your IRA tax deferred.
One caveat to remember is that the year in which you hit your respective RMD age you actually have until April 1st of the following year to take your first RMD, but then you would need to take your second one by December 31st of that same year. When would this be beneficial? A typical scenario might be because you are retiring in the year of your first RMD and don’t want to add extra income to that tax year. Rather wait and take your first and second RMD’s in the following year and be in a lower bracket if you no longer have your salary.
Change #2: The IRA Stretch Provision Has Been Removed
This particular change has far greater implications for estate planning purposes. Prior to the SECURE act, if both spouses passed away and the IRA assets continued to the children, or a non-spouse beneficiary, those beneficiaries could “Stretch” the inherited IRA account out over a number of years. They would only be required to draw out a small amount each year and let the rest of the IRA balance continue to grow tax deferred for the foreseeable future.
Under the SECURE Act law, the inherited IRA account owner is now required to draw out the entire balance by the end of the 10th year after inheriting it. This includes Roth IRA’s as well. The implication is that if the account is a pre-tax IRA then the inherited owner will need to take out far greater distributions each year under the “10 Year Provision” then under the previous “Stretch” provision. If the inherited owner does not take out funds each year, they will be left with a larger balance needing to be taken out by the 10th year. If the account balance is sizeable, this will drastically increase the income for the new owner and push them in a much higher tax bracket. As you can see, this change is a revenue generator for congress unless you plan around it. Without planning your heirs will be left with a much smaller after-tax balance.
For future retirees and those already in retirement, both changes need to be reviewed within the parameters of your own personal situation. They are paramount to consider if you are wanting to make sure your heirs receive the largest after-tax amount possible. Don’t be afraid to draw from a pre-tax IRA account if you are in a lower tax bracket now as you can likely take the funds out at a lower tax rate than those ultimately receiving the balance.