The Setting Every Community Up for Retirement Enhancement Act of 2019, also known as the SECURE Act, became law in December of 2019. As the name implies, the goal of the Secure Act is to help Americans save for retirement. The act does this by making it easier for small businesses to set up 401(k)s, providing tax credits to employers who set up a 401(k) or SIMPLE IRA, and allowing some part-time employees to sign up for retirement plans. But the act also includes certain provisions that will have some people paying more in taxes, as well as some provisions that have little to do with retirement. The following are a few ways the Secure Act may impact your financial plan.
Age Restrictions on Traditional IRA Contributions
One major change brought about by the Secure Act is an update to the age restriction on traditional IRA contributions. Prior to the passing of this act, you could not make contributions to a traditional IRA beginning the year you turned 70 ½. The Secure Act eliminated these age restrictions beginning in the 2020 tax year. This means you may now make contributions to a traditional IRA even if you’re over the age of 70 ½.
The Secure Act does not affect Roth IRA contributions, which don’t have any contribution age restrictions. This law also does not affect the 2019 tax year. The contribution deadline for the 2019 tax year is April 15, 2020. But, if you’re over 70 ½ as of December 31, 2019, you can’t make contributions since it’s still the 2019 tax year. However, you can make contributions in 2020 and beyond.
New RMD Start Date
Another area where this act may affect your financial planning is the required minimum distribution (RMD). Previously, you had to begin taking annual RMDs from tax-favored retirement accounts, such as traditional IRAs and 401(k)s once you turned 70 ½ and then every year thereafter. RMDs have not and do not apply to Roth IRAs, though.
The Secure Act changed the age you must begin taking RMDs from 70 ½ to 72. This only applies if you turn 70 ½ after 2019. If you’ve already turned 70 ½, the updates do not apply. The previous exception to the rule does still apply though. This exception excludes the application of the rule from those who still work as an employee for a company where the employee does not own 5% or more of the company. In that case, the individual can postpone taking the RMD until he or she has retired.
Beneficiaries of Qualified Retirement Accounts
Another way the Secure Act may impact your financial plan is through an update to the rules surrounding beneficiaries of qualified retirement accounts. The act will change how some beneficiaries receive money from retirement accounts they’ve inherited. The Secure Act says that if you inherit a qualified retirement account, you’ll have to withdraw all funds from the account within ten years. Previously, beneficiaries could withdraw money out of these accounts over their lifetime. There is no specific amount you must take each year, but at the end of ten years, there must be no money left in the account.
This update eliminates what was known as the stretch IRA provision. The stretch IRA provision often minimized how much beneficiaries paid in taxes by allowing beneficiaries to stretch the withdrawals over their lifetime. The good news is that this new rule only affects beneficiaries who receive inherited qualified retirement accounts starting in 2020. If you’ve already inherited an IRA or 401(k) plan, the changes will not affect you.
The updates to this rule do have a few exceptions, including if the beneficiary is a spouse, disabled, or is less than ten years younger than the account holder (for example, siblings that are relatively close in age to the account holder). The rule also does not apply immediately to minors. Instead, once the minor who has inherited the account reaches the age of majority, he or she has ten years to withdrawal the funds.
How Does the Secure Act Affect You?
One of the hardest parts of financial planning is keeping up with the constantly changing laws that can impact your plan. However, working with a financial advisor can help ensure that your plan is always kept up to date. For questions about how the Secure Act may have impacted your financial plan, speak with an experience professional from Good Life Financial Advisors of Mount Pleasant today!