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What does the SECURE Act mean to you? Thumbnail

What does the SECURE Act mean to you?

The Setting Every Community Up for Retirement Enhancement Act, better known as the SECURE Act, was signed into law on Friday, December 20th.

Given that many of these changes become effective on January 1, 2020, I wanted to get some information out that walks through the major changes created by the new law.


Required Minimum Distributions (RMDs) Will Start at Age 72, not 70½

Starting January 1, 2020, you will need to start withdrawing money from your traditional IRA's and other retirement plans at age 72, a change from the current withdrawal requirement of age 70½.

However, if you turn 70½ in 2019, you will still need to take your RMD for 2019 no later than April 1, 2020. If you are currently receiving RMDs (or should be) because you are over age 70½, you must continue taking these RMDs. Only those who will turn 70½ in 2020 or later may wait until age 72 to begin taking required distributions.


You Can Contribute to Your Traditional IRA After Age 70½

Beginning in the 2020 tax year, the new law will allow you to contribute to your traditional IRA in the year you turn 70½ and beyond, provided you have earned income. You still may not make 2019 (prior year) traditional IRA contributions if you are over 70 ½.  As far as the deductibility of these contributions, that will still depend on factors such as income as well as whether one has a qualified plan at their employer if still working.


Inherited Retirement Accounts

One of the bigger changes that may have a negative outcome is related to inherited IRA's.  Upon death of the account owner, distributions to individual beneficiaries must be made within 10 years. There are exceptions for spouses, disabled individuals, and individuals not more than 10 years younger than the account owner. Minor children who are beneficiaries of IRA accounts also have a special exception to the 10-year rule, but only until they reach the age of majority.

Many of our clients have felt good that IRA money left to their adult children could be "stretched" over their lifetimes. This was known as a stretch IRA.  Up until now, one could pass away, leave their IRA t their adult child and the child only had to take the Required Minimum Distribution (RMD) over their own life expectancy.  So, for example, Joe passed away at age 77 leaving his IRA to his daughter Alicia who was 44 at the time.  Alicia was required to take these RMD's no later than December 31st of the year following her dad's death.  Going forward, Alicia would not have to take any money out until the 10th year following her dad's passing BUT the account would have to be emptied by then.  This means the tax implications could be worse as well as no money available to help supplement Alicia's own retirement.  This change in my opinion was just a way to pull more tax dollars into the government.

For those that have incorporated certain types of trusts to better manage these distributions, estate planning documents will have to be revised.  When in doubt, reach out to your estate planning attorney to learn more.


Adoption/Birth Expenses

The new law allows penalty-free withdrawals from retirement plans for birth or adoption expenses, up to certain limits.

  • Employers Can Now Offer Annuities in 401K plans

At first glance, having the ability to use an annuity in one's 401k might seem like a real positive.  An annuity generally allows one to take a stream of lifetime payments so in theory, never running out of money.  However, some annuities are not well suited for such a strategy and can carry high expenses.  Also, what isn't always mentioned is the amount one receives monthly is predicated on how much one has saved.  If one has 30k in their annuity, the money will indeed last their whole life but the payment might not be enough to do much good.

As Ethan Schwartz, a writer with Investment News puts it,

"Why would legislators expose savers to such risks? I won’t speculate, but I will note one potentially relevant fact: Over the past 30 years, according to OpenSecrets.org, people and entities associated with three organizations — Mass Mutual Life Insurance, FMR (the parent company of Fidelity Investments) and the National Association of Insurance and Financial Advisors — have collectively been the largest donors to Congressman Richard Neal, who introduced the legislation in the House."  Hmmm, seems like a bit of a conflict of interest to me.

  • New Parents and Student Loans

The new act allows for some opportunities.  One can withdraw up to $5,000 from their IRA to cover the cost of adoption or a birth without the usual 10% penalty.  Of course, since this bill focuses on tax raising revenue, regular ordinary income taxes will be due.  Bear in mind, lawmakers are not financial planners (even if they sit on some type of finance committee).  Retirement plans are named as such as they are for retirement.

One can also withdraw up to $10,000 from 529 college plans to use for student loans.  According to NBC News, those over the age of 60 with student loans has doubled over the last decade.

There are many more aspects and provisions to the new law. Please see your tax advisor for more specific information. Financial Planning Solutions, LLC  does not provide specific tax advice, however, feel free to reach out to us as a first discussion.

I'm here to help.

All the best.

Rick Fingerman, CFP®



Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.

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