Written By: Will Steinberger
Congress recently passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. It changes some important aspects of retirement planning that may affect you. If you’re a client of Opes Wealth Management, we will account for the changes as they apply to your specific situation.
The key takeaways are summarized below:
Change of Age for Required Minimum Distributions (RMDs)
Under the old law, if you owned a traditional IRA you would have to begin withdrawals the year you turned 70 ½. The new law pushes that start date to age 72.
If you turn 70 ½ in 2020, you won’t need to begin withdrawals until the year you turn 72. However, if you were 70 ½ by the end of 2019 or are already receiving RMDs, you must follow the old rules.
Despite the delay in the starting age for RMDs, Qualified Charitable Distributions (QCDs) from IRAs will not be affected. QCDs may still be taken from an IRA as early as age 70 ½.
Changes to Inherited IRAs
Non-spouse beneficiaries of traditional or Roth IRAs used to be able to “stretch” the withdrawals over the remainder of their life. This was a popular estate planning strategy for passing on tax-free growth to younger heirs.
Under the new law this option goes away. Now these beneficiaries will have to fully withdraw the inherited IRA by the end of the 10th year after the account owner’s death. For many beneficiaries this could mean a larger tax burden.
Another change is that heirs subject to the 10-year withdraw rule are not required to take regular annual withdrawals. This provides some flexibility about the timing of those distributions, which could be helpful. For example, a Roth IRA beneficiary could postpone all withdrawals until the end the 10th year, which allows more time for tax-free growth. Heirs of traditional IRAs can also postpone withdrawals, although taking out a lump sum from this account type may result in a higher tax bracket. However, this flexibility to choose when to make withdrawals will allow for a more strategic approach. For example, heirs could choose to withdraw more in lower-income years, leading to lower taxes on the withdrawal.
There are a few exceptions: IRA heirs who are surviving spouses are still covered by the old rules and are eligible for the stretch option. Also eligible for this are heirs who are disabled or chronically ill, or those who are less than ten years younger than the deceased IRA owner.
If you were the recipient of an inherited IRA prior to 2020, you are not subject to the new rules and can continue to withdraw the money as you have been.
IRA Contribution Age Limit Removed
If you have earned income you were previously unable to contribute to an IRA after age 70 ½. The new law removes that age cap.
529 Distributions Allowed for Student Loan Repayment
For those with 529 college savings accounts, a lifetime maximum of $10,000 is now allowed to be withdrawn tax free to pay off student loans. Previously these accounts were only eligible to cover qualified college costs, such as tuition and textbooks.
Penalty-Free IRA Withdrawals for Newborn Children and Adoption Costs
For new parents with retirement accounts, up to $5,000 can now be withdrawn penalty free to cover the costs of a newborn child or adoption costs. Previously there was a 10% penalty on all withdrawals if you were under the age of 59 ½. However, you will still owe state and federal income taxes on these withdrawals.
These changes may require new considerations for your retirement income and estate planning. As you move forward in 2020 make sure that your tax and legal professionals are also aware of these changes and how they affect you. If you have any questions, please let us know.