By Kristie Garrett, CFP®, CRPC® and Eric Sholberg, CPA, AIFA
Late last month, the Senate passed and President Trump signed into law the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The law, broadly aimed at retirement security, introduces several provisions impacting both individual investors and employers overseeing 401(k) plans.
While we will not cover the law in its entirety—we encourage you to review Fidelity’s issue brief for more detail—we wanted to share key takeaways from the legislation that affect individual investors and retirement savers.
Increases the Required Minimum Distribution Age to 72
In the past, most individuals had to begin taking out annual required minimum distributions (RMDs) from retirement plans or IRA accounts in the year they turned age 70½. The SECURE Act delays that withdrawal requirement to age 72.
Note that this only applies to those who reach 70½ after 2019. If you turned 70½ during 2019, you still must take RMDs by April 1, 2020, and withdraw additional RMDs by December 31, 2020 and every December 31 thereafter.
In keeping with previous law, individuals working beyond age 72 can further delay taking RMDs from most employer-sponsored retirement plans until after retirement.
Eliminates Age Limitations on Traditional IRA Contributions
For individuals with earned income beyond age 70½, the SECURE Act also removes the maximum age limit—formerly capped at 70½ years old—for traditional IRA contributions.
Nothing changes for Roth IRAs—when eligible, you can continue to contribute at any age as long as you have earned income within eligible ranges.
Removes the RMD Provisions for Stretch IRAs
Effective January 1, 2020, non-spousal inheritors of IRAs must exhaust distributions by the end of year 10 (exceptions apply for “eligible designated beneficiaries,” as explained below) after the original account owner passes away.
Non-spousal beneficiaries can no longer “stretch” IRA withdrawals over the span of their lives. The new rule also applies to inherited 401(k) and Roth IRA accounts, but distributions from the latter are not taxable.
The smaller window for inherited RMDs may result in a heavier tax burden for beneficiaries who may also be in peak earning years. Before the owner of an IRA or retirement plan passes away, it can make strategic sense to consult your tax advisor to consider Roth conversions.
Eligible designated beneficiaries, including surviving spouses, minor children of the decedent, disabled or chronically ill beneficiaries, and beneficiaries who are less than 10 years younger than the decedent, may continue to stretch RMDs over their lifetime. Once a minor reaches the age of majority, the 10-year withdrawal provision applies.
Our team will continue to evaluate the SECURE Act and share any additional highlights in the coming months.
Kristie Garrett, CFP®, CRPC® and Eric Sholberg, CPA, AIFA serve as retirement plan advisors at Brighton Jones.
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