The new year brings new rules for retirement planning curtesy of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The SECURE Act was actually passed by the House in early 2019, approved by the Senate in December 2019 and signed into law December 20, 2019 just in time for 2020.
The SECURE Act ushers in several new tweaks (reverting the Kiddie Tax back to the parents’ top marginal rate) but most notably, the elimination of what planners refer to as the “Stretch IRA”. Prior to the SECURE Act, a non-spouse beneficiary of an inherited IRA could generally “stretch” the payout of that IRA over their life expectancy. That’s gone! Heirs must now empty the account in ten years. There are, of course, exceptions to this new law. Spouses and minor children are generally exempt, as are heirs that are not more than ten years younger than the deceased.
Eliminating the stretch provision can cause problems for heirs. If the inherited IRA is large, and must be paid out over ten years, this could force you into a higher income tax bracket. Consider if you are an older heir, this could increase your income and cause you to pay higher Medicare premiums. Another problem, what to do with the extra income if you don’t need it?
The rules for required minimum distributions (RMDs) also changed under the SECURE Act. Previously, one had to begin taking RMDs at age 70 ½ from a traditional IRA or qualified retirement plan. Starting in 2020, that age is now 72. This gives your account more time to grow. If you turned 70 ½ by the end of 2019, you follow the old rule.
A bit of good news for those working into their early 70s. Previously, if you worked and had earned income, you could not contribute to a tax-deductible IRA after age 70 ½. Now, you can. This gives you more of a chance to build up your retirement funds if you are still working and trying to save.
The SECURE Act changes affect qualified retirement plans, ROTH accounts, trusts, and more. One thing you should do, is check your beneficiaries on qualified plans and traditional IRAs to make certain the person in line to receive your account still fits in with your financial plan. Remember, these changes could alter your heir’s financial plan as well. As an independent Certified Financial Planner™, I can help you plan for the new year and be on top of your goals. Contact me and let’s get started! #talktometuesday #education #Hireaplanner #stressfree #newyear #savings #planning #SECUREAct