The SECURE Act
The SECURE Act—short for “Setting Every Community Up for Retirement Enhancement”—was recently signed into law by President Trump and went into effect Jan. 1, 2020, inevitably affecting most retirement savers. With lots of media coverage on this topic, here’s what you really need to know:
Required Minimum Distributions (RMD) will now start at age 72, not 70 ½
The SECURE Act delays the first time a retiree has to make a distribution from tax deferred retirement accounts (IRAs, 403(b)s, 401(k)s, etc.) from 70 ½ to 72. This change allows retirees who do not need to supplement their retirement income needs from their qualified retirement accounts to continue to defer distributions (and the tax due on those distributions) for another year and a half. However, if you attained 70 ½ prior to Dec. 31, 2019, you are not eligible for these new rules and will need to continue your RMD payments under the previous guidelines.
You can now contribute to your traditional IRA after age 70 ½
Provided you have earned income in the tax year, the SECURE Act allows those who plan to continue working longer to also continue making contributions to their traditional IRA accounts past the age of 70 ½ and receive the potential tax deduction by doing so.
The “Stretch IRA” estate planning method has mostly been eliminated
Prior to the SECURE Act, when IRA accounts were inherited by non-spouse beneficiaries, the taxable withdrawal from these accounts could typically be “stretched” over that beneficiary’s lifetime—effectively extending the tax deferral over many generations. Now (with a few exceptions like spouses, the chronically ill or disabled), an inherited IRA account must be fully withdrawn (and thus fully taxed) within 10 years of inheritance. A key piece with this change is that the new legislation is not retroactive and will only apply to inherited IRA accounts that were established after Dec. 31, 2019.
401(k) plans change for small business owners and part-time workers
For many small business owners, the time, effort and costs incurred to establish retirement plans has largely hindered many companies from offering these tax advantaged savings vehicles to their employees. The SECURE Act, however, has provided a few welcome changes in the retirement plan space that could help (and in some cases incentivize) small business owners to offer 401(k) savings plans to their employees—even expanding the laws to allow access for part-time employees (500-plus hours for three consecutive years or 1,000-plus hours in one year).
Steven C. Finkelstein, CFP®, and Megan E. Gehrman, CFP®, are Principals and Financial Advisors at Sterling Retirement Resources Inc., 8401 GoldenValley Road, Ste 225, Golden Valley, MN 55427. (763) 762-3400.Securities and advisory services offered through Cetera Advisor Networks LLC, Member FINRA/SIPC, a Broker-Dealer & Registered Investment Advisor. Some advisory services also offered through AdvisorNet Wealth Management. Cetera is under separate ownership from any other named entity.
Some IRA’s have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney. Distributions from traditional IRA’s and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 1/2, may be subject to an additional 10 percent IRS tax.