By Stephen Hassell, CFP®
The SECURE Act was signed into law on December 20, 2019, and may have important ramifications on your retirement planning. The new law changes also contain other favorable elements that may help those who have family members dealing with student loan debt or young families looking to adopt or have a child. We will summarize some of the key areas we feel are likely to impact your financial planning going forward.
Extend the Start of Required Minimum Distributions (RMDs) from Retirement Accounts to Age 72
For most of your life, you have saved into an IRA account or employer-sponsored plan like a 401(k). While these contributions were likely done on a pre-tax basis, which reduced income taxes at the time, as you enter retirement any distributions from these account types are taxed as ordinary income.
Prior to the SECURE Act, the IRS required certain amounts be withdrawn each year starting at age 70.5 so that they could hopefully collect some tax revenue off those distributions. With this recent law change, you now have an extra year and a half to delay distributions. With the RMD age change to 72, you have additional time for proactive tax planning.
This means that you may be able to accelerate income from retirement accounts prior to this age to lower the amount of RMD required when you do reach age 72. Or, it may simply allow you one additional year or so to plan your personal income and tax situation to better suit your goals.
If you turn 70.5 after December 31, 2019, you are eligible to delay the start of RMD. Speak with your financial planner about any opportunities that may make sense for you.
Changing Rules When You Inherit a Retirement Account from a Non-Spouse
If you are married and your spouse dies and leaves their retirement accounts to you, you will still inherit those assets and they will become an IRA account in your own name. The changes come into play for non-spouse beneficiaries inheriting IRAs.
Prior to the passing of the SECURE Act, when a non-spouse beneficiary (e.g., son or daughter) inherited a retirement account (like an IRA), that beneficiary would be able to place the money into a Beneficiary IRA and take periodic payments over the remainder of their life. This allowed the money to continue growing tax-deferred during that time—a potential tax benefit to heirs. This arrangement has often been referred to as a Stretch IRA.
With the passage of the SECURE Act, most non-spouse beneficiaries will have to take out the entire value of the inherited retirement accounts within 10 years. To learn just how impactful this may be to you or your heirs, use the Stretch IRA Calculator to calculate changes in the required distribution.
A planning strategy that may present itself is to engage in excess distributions from the IRA during your life if you can do so at relatively low tax rates and re-invest that money into a non-retirement investment account. In some cases, you may even consider a Roth conversion of some of the IRA money.
This may provide greater flexibility surrounding what your heirs inherit at your death and how that inheritance impacts their financial situation from a tax perspective. Consider working with your financial advisor to determine if any planning opportunities make sense for your situation.
Making Traditional IRA Contributions Beyond Age 70.5
If you are over the age of 70 and still working, you are not alone. To deal with the realities of many people choosing to remain in the workforce longer, one of the updates taking place with the SECURE Act is to allow actively employed individuals the ability to continue making Traditional IRA contributions each year indefinitely, as long as they are still earning an active income through their job. As of 2020, the IRA contribution limit is $7,000 per person if age 50 or older.
If you remain employed beyond age 72, which is the new RMD age, it may make sense for you to focus your savings into an employer-based plan like a 401(k) rather than a Traditional IRA. Employer-based plans will usually not require you to begin mandatory distributions (RMDs) until you stop working (assuming you are not an owner in that business). This strategy can provide additional years of tax-deferred growth on your investments.
Penalty-Free Withdrawals from Retirement Plans for Birth or Adoption
If you have ever tried to access your money held inside retirement accounts prior to turning age 59.5, you are probably familiar with the 10% early-withdrawal penalty that applies in most cases. Thanks to the SECURE Act, there are now new situations in which that penalty is waived.
If you give birth or adopt a child, you can now take up to $5,000 per year from retirement accounts penalty-free upon the qualifying event. While we always recommend individuals maintain an adequate emergency fund to cover expenses like this, the law change can provide greater flexibility if you do not have the funds available in other accounts to cover these costs.
Remember, any withdrawals from retirement accounts are still subject to ordinary income tax treatment even if not subject to the early-withdrawal penalty.
Pay Down Student Debt with 529 Funds
Perhaps you have a 529 plan for a child or grandchild and those beneficiaries have taken out student loans for a portion of their higher education tuition and related expenses. With the passing of the SECURE Act, you can now use up to $10,000 of funds inside a 529 plan to pay off or reduce the outstanding student loan debt of the 529 plan beneficiary.
You can even use these funds to pay down student debt of a sibling of that beneficiary who may have student debt they are trying to eliminate.
Coordinating Law Changes with Your Financial Planner
The above changes underscore some of the key areas of the SECURE Act likely to impact your retirement planning. We encourage you to work with your financial planner to determine how any of these changes impact the plan you may currently have in place.
If you do not have a plan, consider speaking with a professional that places a financial plan at the core of the relationship as a properly crafted plan can help provide the necessary context to make more informed decisions throughout your life’s journey.
If you want to learn more about our Houma, LA financial advisory team and our approach, schedule a 30-minute discovery call. Our experienced team of wealth advisors are driven to help provide clarity, strategy, and accountability to your financial life.
If you wish to explore the full language of the SECURE Act, you can access it through the Congress.gov website.