The broadest piece of U.S. retirement legislation since the 2006 Pension Protection Act took effect January 1, 2020. The Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed by Congress and signed by President Trump in December. The most immediate impact of this new retirement savings legislation will be felt by those nearing or in retirement.
RMD Age Increase
Prior to SECURE, retirees were required to start withdrawals at age 70½ years from traditional Individual Retirement Accounts (IRAs) or employer-sponsored retirement plans like 401(k)s. For those who haven’t reached 70½ by the end of 2019, the Required Minimum Distribution (RMD) now must begin at age 72. That means 18 more months to grow investments before taking distributions and paying taxes.
The change also provides two additional years for Roth IRA conversions without having to worry about the impact of RMDs. Unlike a traditional IRA, Roth withdrawals are tax-free as long as you meet certain requirements and there are no RMDs during your lifetime. The general goal of a Roth conversion is to move taxable money from an IRA into a Roth at lower tax rates today than you expect to pay in the future.
Estate Planning Snag
A drawback of SECURE is removal of so-called “stretch” and “pass-through” provisions for retirement accounts beneficiaries. Formerly, if an IRA or 401(k) was left to a non-spouse or trust, the beneficiary could typically stretch out the tax benefits of the account over an extended period. With the new retirement savings legislation , however, beneficiaries will have to distribute the entire inherited account within 10 years after the owner’s death (there are a few exemptions).
Accelerated distributions mean more taxable income at potentially-higher rates. Such income may also affect means-tested Medicare premiums and Medicaid benefits of low-income retirees or individuals with special needs.
We encourage you to talk with your financial planner about reviewing your retirement accounts and estate plans to ensure they still align with your goals and that you’re taking full advantage of the new opportunities.