SECURE Act and Retirement: What It Means for You
While political issues aren’t necessarily a common influence on financial planning, the newly passed Setting Every Community Up for Retirement Enhancement (SECURE) Act could affect your retirement plan, as well as your taxes and estate plan. Notably, the SECURE Act could affect how you pass on assets to your heirs, as well as the age you start taking distributions from your retirement accounts.
Elimination of the Stretch Retirement Account
If you were planning to pass on an IRA or an employer-sponsored retirement plan to someone other than your spouse, the SECURE Act affects how your beneficiaries withdraw the money. Instead of being able to stretch out this inheritance over their lifetime, under the SECURE Act, a non-spouse beneficiary must withdraw the money from their inherited retirement plan within 10 years.
That means that if your kids or grandchildren inherit $1 million in an IRA, for example, they would have to withdraw the entire sum within a decade. Doing so would likely have a significant impact on their taxes and may not leave them with as much money as you had hoped.
There are exceptions to the rule:
- If your beneficiary is less than 10 years younger than you (such as an unmarried partner or a sibling)
- If your beneficiary is your child and a minor (the 10-year rule will apply once they reach the age of majority in their state)
- If your beneficiary is disabled or chronically ill
You may want to review your estate plan and consider whether changes are needed. For example, you may be better off naming your spouse as the beneficiary of your retirement plan assets, whereas your adult children would receive assets from a general brokerage account.
This is just an example, of course, and your optimal course of action will depend on your specific situation. We recommend you talk with a financial advisor who can advise on estate planning strategies in light of your overall financial situation and goals.
Adjusting RMDs and Contribution Ages
Another SECURE Act change raised the age you must take required minimum distributions (RMDs) from age 70½ to age 72. This change applies if you reach age 70½ after January 1, 2020.
The new RMD rules can delay having to pay taxes on your retirement assets. You may also gain time to convert an IRA to a Roth IRA, if a conversion is part of your financial strategy. Considering the five-year period that is required before withdrawals can be made tax-free, you may leverage the increased RMD age to make a conversion to a Roth IRA, which is not subject to RMDs.
You could also pass on the Roth to your heirs, who can allow the contributions to compound during the 10-year time frame and would not be taxed on the withdrawals.
Finally, if you are still working, you are now allowed to contribute to an IRA at any age. Previously, you could not contribute after you reached age 70½.
Use Change as an Opportunity
The SECURE Act may present opportunities to those who can be proactive and make adjustments to their retirement planning based on the new law. Consider talking with a financial advisor on whether the new rules affect you and how they may optimize your retirement planning, such as by allowing you to reduce taxes with the use of Roth IRA.
Because the law can also affect inheritance and tax planning, your advisor can help you adjust your financial plan accordingly and recommend you to other professionals as needed, such as an attorney to draw up new estate documentation.
If you’d like to discuss in more detail how you can adapt to the changes from the SECURE Act or have any other retirement planning questions, reach out to the team at Financial Dynamics for some guidance. You can call our financial advisors in the Richmond, VA, area anytime at 804-777-9999. Or simply text the word “tips” to that number, and we’ll be sure to respond back to you shortly.
You can also listen to our podcast where we discussed this legislation prior to it fully becoming the law.
To discuss your personal situation with a financial advisor, schedule a complimentary 30-minute phone call.
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