The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) is significant for many, employees and employers alike. For example, these new laws present opportunities for small business owners, part-time employees and retirees to begin or continue working toward their retirement savings goals.
SECURE Act: 3 Key Concepts for Retirees
It may seem strange to think about retirees planning for retirement but ask any one of them and most will likely tell you, it is perpetually top-of-mind. A good retirement strategy can change for a host of reasons. Being prepared for retirement means being prepared for changes during retirement too.
1. New 10 Year Rule Replaces “Stretch IRA”
The SECURE Act of 2019 brought about major changes for a common planning tool known as the “stretch IRA”. When an IRA account owner dies in 2020 and has someone other than a spouse indicated as the beneficiary, the non-spousal beneficiaries (other than those listed below) must withdraw the entire balance by the end of the 10th year following the year of inheritance.
Spousal beneficiaries are not subject to the 10-year rule and are still able to rollover their deceased spouse’s IRA into their own IRA and use their own age-based start date for taking Required Minimum Distributions from the account. In addition to spouses, beneficiaries with the following circumstances are also excluded from the 10-year rule:
- Chronically ill
- Individuals not more than 10 years younger than the decedent
- Certain minor children (of original account owner), but only until they reach the age of majority or complete a “specified course of education”
Individuals who have named a trust as the beneficiary (primary or contingent) of their IRA should speak with their financial advisor and estate planning attorney.
2. Required Minimum Distributions at age 72
The news these days may have us thinking differently but generally we are all benefiting from modern medicine and are living longer. As such, if you turn age 70½ in 2020 or later, you may take your RMD when you reach age 72. This extra time before RMD withdrawals allows your assets to continue to grow. In case you are wondering, the age for making Qualified Charitable Contributions remains at 70½.
3. Traditional IRA contributions may continue beyond 70½
Provided you have earned income and you are age 70 ½ in 2020, you may still contribute to your IRA. This includes “backdoor” Roth contributions. To explain, the IRS income limitations may keep higher earners from contributing to a Roth IRA. However, this same high earner’s contribution to a traditional IRA (which is nondeductible) can be converted to a Roth IRA. There continue to be no age restrictions on Roth IRA contributions. Before – or in addition to – contributing to an IRA, individuals should consider maximizing contributions to employer sponsored plans, such as a 401(k) plan or SEP IRA. Employer sponsored plan participants enjoy higher contribution limits and more favorable tax treatment than those contributing to IRAs. Be mindful of IRS limits on qualifying for the income tax deduction on IRA contributions.