The SECURE Act: New retirement laws took effect on January 1, 2020
As we rang in the 2020 New Year, Congress was busy passing the SECURE Act (Setting Every Community Up for Retirement Enhancement).
The law looks to improve retirement security for many Americans. The passing of this legislation is very impactful, especially to retirees.
It's important to understand how this may impact your retirement. The EWM Advisor team is highlighting some of the key components of the Act for you here:
- IRA BENEFICIARIES
One of the biggest changes is how non-spouse beneficiaries inherit IRAs. Before, they were able to ‘stretch’ the distributions over their life expectancy. Now, with few exceptions, non-spouse beneficiaries must liquidate the inherited IRA within 10 years. This can create potentially large sums of income that will be taxed at the beneficiary’s ordinary income tax rates.
As an example, child beneficiaries typically inherit Mom or Dads remaining IRA funds when they themselves are close to retirement. These beneficiaries could already have a high tax rate personally. The new law would require them to liquidate the inherited funds within 10 years of receipt, causing a taxable event in their name at a high rate that previously could have been stretched along their lifespan.
Estate Planning has always been a critical part of a financial plan. With the SECURE Act, it is more important than ever.
- ROTH CONVERSIONS
Strategies, such as ROTH conversions, could potentially save thousands in taxes.*
- AGE LIMITS
Those who have earned income can contribute to retirement accounts with no more age limits. Individuals are no longer prohibited from making traditional IRA contributions over age 70 1/2. (If you are over 70.5 with earned income, speak with an EWM Private Wealth Advisor to see how retirement plan contributions can continue to work for you.)
- REQUIRED MINIMUM DISTRIBUTIONS
Starting in 2020, required minimum distributions (RMDs) now begin at a later age, 72. Thus allowing IRAs to stay invested longer. (If you turned age 70 1/2 in 2019, it could be different for you if you already took your first distribution.)
- PENALTY-FREE WITHDRAWAL
The Act permits parents to withdraw up to $5,000 from retirement accounts (penalty-free, regular income tax rates apply) within a year of birth or adoption for qualified expenses (determined in the Law).*
- STUDENT LOANS AND 529 FUNDS
529 funds can now be used to pay down student loan debt (up to $10,000).
- SMALL BUSINESS OWNERS
There are several other provisions to the Act including implications for small business owners.
*For your unique situation, speak with your financial advisor or an EWM Private Wealth Advisor to review strategies and options that suit your financial plan.
This post represents a few key points of interest from The SECURE Act and by no means presents the complexity or full information contained within The Act. Every individual’s situation is different. You are encouraged to read The Act and contact your Private Wealth Advisor or Tax Professional for further information on how The Act may affect you. The information is obtained from a source believed to be accurate, but accuracy cannot be guaranteed.
Image credit: Photo by Caleb Perez