The SECURE Act and How It May Affect You

Billed as a way to help Americans expand their retirement savings, the Setting Every Community Up for Retirement Enhancement (SECURE) Act may prove to cut both ways. The SECURE Act, which passed the House of Representatives on May 23, 2019 and was signed into law by President Trump on December 20, 2019, went into effect on January 1, 2020. Some Americans will save more, thanks to its provisions, while others will find themselves faced with increased tax burdens.

Will the SECURE Act help you grow your retirement savings? It’s possible – though you may have to make changes to your existing retirement or estate plans to take advantage.

What the SECURE Act Does

This legislation includes more than two dozen provisions. Many won’t change how average Americans save for retirement. But several of the most significant provisions could have a direct effect on how you manage your money in the coming years, so it’s important to understand the basics of what the SECURE Act does.

• Lifts age restrictions on IRA contributions Prior to the passage of the SECURE Act, individuals with traditional IRA accounts were only able to make contributions up until the age of 70 1/2. This age cap prevented seniors who were still collecting income from making tax-advantaged contributions to retirement accounts. The SECURE Act repealed that age cap. Now, seniors may continue to make contributions to their traditional IRAs for as long as they continue to receive income.

• Increases the required beginning date (RBD) for required minimum distributions (RMDs) from 70 ½ to 72 This provision is intended to reflect the fact that Americans are working and living longer than they did in the past. Previously, individuals with qualified retirement accounts were required to start annually withdrawing funds from these accounts starting at age 70 1/2. Per the SECURE Act, individuals don’t have to start taking RMDs until the age of 72, giving their accounts extra time to grow.

• Allows penalty-free withdrawals of $5,000 by each parent in the year of birth or adoption of a child While many of the SECURE Act’s provisions are designed to help Americans of retirement age, this element of the law is aimed at new parents. Prior to the passage of the SECURE Act, a parent who withdrew funds from a retirement account would be hit with a 10 percent early-withdrawal penalty. Now, a parent may withdraw up to $5,000 from retirement accounts in the year of a child’s birth or adoption without penalties. That means two-parent families may pull up to $10,000 from their retirement accounts during a year when a new child joins the family.

• Requires most non-spouse beneficiaries to withdraw inherited account balances within 10 years of the account owner’s death This provision will affect individuals who inherit IRA accounts in the coming years. Until now, such a beneficiary would be able to withdraw funds gradually, stretching those distributions out over a lifetime. Taking smaller distributions would also limit the beneficiary’s annual tax payments. Now, some beneficiaries will have to withdraw all assets within 10 years of the account owner’s death. It’s not retroactive, so this provision will only affect cases in which the account owner dies after January 1, 2020. There are exceptions. An account owner’s spouse and minor children are exempted from the 10-year requirement, as are beneficiaries who are disabled or chronically ill or less than 10 years younger than the account owner.

How the SECURE Act Might Affect You

Exactly how this new legislation will affect you depends largely on your age and retirement plans. For a young parent struggling to afford adoption fees or birth-related costs, the lifting of the early-withdrawal penalty may have a profound positive impact. If you’re nearing your 70s, still working and focused on maximizing your retirement savings, the repealment of the age cap for IRA contributions could be very good news. And some Americans won’t experience any major changes that can be attributed to the SECURE Act.

However, the new requirements around withdrawing inherited account balances could have significant, potentially negative implications for many beneficiaries in the coming years. Prior to the SECURE Act, an individual who inherited an IRA account could use a trust with conduit provisions to stretch the money and minimize taxes. The required minimum distribution would be calculated based on the beneficiary’s life expectancy, so a beneficiary who was expected to live for 40 more years could divide their payouts over 40 years. These arrangements are often described as “stretch IRAs.” The beneficiary would have to pay taxes on the RMD each year, so the tax payments would also be stretched out over a long period. Under the new law, non-exempt beneficiaries can no longer stretch distributions in this way. Within 10 years of the account owner’s death, the assets must be withdrawn and taxes must be paid.

If you’ve set up a trust with conduit provisions, in anticipation of stretching your assets for future generations, now is a good time to review your plans. Your estate planning advisors can help you determine what effect, if any, the SECURE Act will have on your retirement plans. Also keep in mind that these new changes could also affect your own financial future. If you know that a loved one has named you as the beneficiary of an IRA and you won’t meet the criteria for an exception from the 10-year cap, having that information now may inform how you plan for what’s ahead.

Because it’s been so recently enacted, there’s a lot of uncertainty around how the SECURE Act will impact Americans saving for retirement. The best way to combat that uncertainty around your own plans is to review them with your retirement planners. The team at Ladimer Law can help you determine how to move forward, whether that’s setting up new trusts, updating your beneficiaries or leaving your current plans in place.

Will your existing plans allow you to have the retirement you deserve and provide maximum protection for the loved ones who survive you? Contact us to schedule an appointment today to make sure.