The SECURE Act for Individuals
Legislators always love to come up with convoluted titles to create a catchy acronym. “The SECURE Act” is another great example. SECURE stands for “Setting Every Community Up for Retirement Enhancement”. I mean, really?
As with a lot of legislation that gets passed without a lot of fanfare (this was attached to the Annual Spending bill), not many people know how they are impacted. Here, we are going to go over 2 that we see affecting our individual clients: Required Minimum Distribution (RMD for short) age change, and Stretch IRA provisions.
RMD Age change
This only impacts those who have not turned 70½ before Jan 1 2020. If you are already taking RMDs, or turned 70 after June 2019, this part does not apply to you.
The Secure Act changed the age individuals must start withdrawing a minimum amount from their IRA. The age rule before was a little complex, and confusing; not really a surprise coming from the government. The rule was that one had to make a withdrawal of a minimum amount (determined by an IRS life expectancy table) by April 1 of the year following the year in which you turn 70½. Pretty confusing, right?
Under the new law, you have until the year you turn 72 to begin taking withdrawals (technically still until April of the following year). Pretty simple and straight forward. Will you turn 72 this year? You need to take a minimum amount out of your account. While not a big difference in time - only a 1½ years - it at least is a little easier to understand and follow.
The qualified charitable withdrawal-direct to charity contributions- is unaffected by the age 72 extension.
Stretch IRA change
What is a Stretch IRA? While not an official IRS term, you can find a detailed explanation here. The gist is that it allowed for beneficiaries to take withdrawals from an IRA over their life expectancy (or if certain types of trusts a defined period of time). This was very beneficial to the inheritor of the IRA because they could continue to tax-deferred growth on the account, and if they were young, have minimal withdrawals and tax implications.
With the SECURE Act, this changes dramatically. Now the beneficiaries, except for Eligible Designated Beneficiaries (spouses, minor children of the deceased account owner, a beneficiary who is no more than 10 years younger than the deceased account owner, a chronically ill individual, or a disabled individual), will no longer be able to take withdrawals over their life expectancy. Instead, the account will have to be depleted by the end of the 10th year following their death.
This could be a rather large impact tax wise. A $1 million IRA passing to a single beneficiary could easily push someone into a higher tax bracket.
The SECURE Act brought about a number of changes to retirement planning. Now is a great time to talk with your advisor and tax professional to determine what, if any, adjustments you should be making to your retirement and estate plans.
Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James.