Some pretty big retirement planning changes are officially underway, thanks to new legislation that was passed at the end of 2019. The Setting Every Community Up for Retirement Enhancement (SECURE) Act is also nudging many to rethink their approach to estate planning.
It’s a busy time for wealth advisors as we help our clients navigate this tricky new terrain and stay on track for their retirement—especially since the SECURE Act is shaking up the rules around contribution age limits and required minimum distributions. You can also expect major changes for your IRA beneficiaries.
Here’s everything you need to know about how the SECURE Act will impact the way you plan for retirement.
You Can Potentially Contribute More to a Traditional IRA
Let’s start with some good news. Prior to these new changes, you could only contribute to a traditional IRA until age 70½. That’s now a thing of the past. As long as you’re still working and earning income, you can keep contributing. It’s a definite win for anyone planning on staying in the workforce a little longer because it gives them more time to continue reaping the tax benefits of a traditional IRA while saving for retirement.
The Required Minimum Distribution (RMD) Age Is Changing
Up until this year, folks were required to begin taking RMDs at 70½ for retirement accounts that are funded with pre-tax dollars—like 401(k)s and traditional IRAs. Why? The IRS wants you to begin withdrawing those funds by a certain age and, in turn, paying taxes on those distributions.
The SECURE Act has pushed the RMD age up to 72 for people who will turn 70½ during 2020. If you’re in this boat, it’s time to rethink your withdrawal strategy in retirement. Remember: every distribution translates to a tax bill. Failing to plan ahead here could result in a higher tax burden in retirement, which is something nobody wants to be surprised with.
There Are New IRA Rules for Beneficiaries
Your retirement accounts aren’t just for you. Beyond providing income in retirement, they are also assets that can be left to your loved ones after you’re gone. Prior to this new legislation, a beneficiary who inherited an IRA could stretch that money out over the course of their lifetime—meaning they could defer their distributions to provide a lasting trickle of income over the long term. On top of that, “stretch IRAs” soften the income tax blow.
The SECURE Act is turning the stretch IRA on its head. Now many beneficiaries will have just 10 years to withdraw all funds from inherited 401(k)s or IRAs. Imagine your surviving child receiving distributions of, say, $250,000 per year under the new rules. That translates to a huge tax bill thrown on their lap. (FYI, the rules are different for widows, chronically ill or disabled beneficiaries, minor children and others. An experienced wealth advisor can clarify if you’re exempt.) So what does this all mean for you? Now is the time to reevaluate your wills, trusts and estate plans. Otherwise, your heirs could be slammed with sizeable tax burdens when utilizing these inherited accounts. Their distribution timeline could also be significantly shorter—a big detail if you were hoping for your retirement accounts to provide them with lifelong income.
One solution, for example, is to consider Roth IRA conversions to help your beneficiaries save on taxes later down the road. Setting up a charitable remainder trust and naming a loved one as the income beneficiary is another workaround. They’ll have the ability to stretch their distributions over the long haul until their death or the trust expires (whichever comes first), after which those funds will be inherited by whichever charities you’ve designated.
The truth is that most Americans aren’t reading up on tax laws and the latest retirement legislation—that’s our job, and we happen to love it. At JJ Burns & Company, we’re helping our clients make sense of what the SECURE Act means for them and their future. The end goal is crafting an individualized retirement plan that feels just right for you and your family.
Curious about how the SECURE Act impacts your retirement plan? Contact JJ Burns & Company to iron out the details.