Congress changes the rules for retirement planning
Stephen Tuttle

Congress recently made significant changes to the rules around retirement plans. The Secure Act (Setting Every Community Up for Retirement Enhancement Act) passed through Congress and was signed by the President in the final weeks of 2019.  The new law expands opportunities for individuals to save for retirement, but also changes the way beneficiaries receive money from inherited IRAS.  Here are highlights of the changes that are most likely to affect individuals.

Good News

You may contribute to a Traditional IRA after age 70 ½ – Beginning in 2020 and beyond, the new law removes the age limit at which an individual can contribute to a traditional IRA.  So anyone that is working and has earned income may contribute to a traditional IRA regardless of age.

Required Minimum Distributions (RMDs) start at age 72, not 70 ½ – The law raises the age at which an individual must begin taking RMDs.  The benefit is two extra years to save, potentially grow assets and defer taxes on retirement account assets.  Notably, this change only applies to those who turn 70 ½ in 2020 or later.  Anyone who turned 70 ½ in 2019 is required to continue RMDs under the old rules and to take an RMD in 2020 and each year thereafter.

Bad News

Elimination of the “stretch” provision of inherited IRAs for most non-spouse beneficiaries – For many retirement owners who pass away in 2020 and beyond, beneficiaries will have “only” 10 years to empty the account.  This hurts financially comfortable folks who don’t need their IRA balances for their own retirement years, and who want to use those assets to set-up a long-term tax-advantaged plan for their heirs.    The change restricts a simple strategy that has been popular with many IRA owners.  Under previous rules, non-spouse designated beneficiaries could take distributions over their life expectancy.  For example, a 25-year-old heir of her grandfather’s IRA could take payouts over about 60 years – hence the name Stretch IRA

Under the new 10-year rule, the entire inherited retirement account must be emptied by the end of the 10th year following the year of inheritance.  However, there is some flexibility, as there are no distribution requirements within the 10-years…only that all assets must be withdrawn at the end of 10-years.

Other Things to Consider 

  • Make your Spouse the Beneficiary to your IRA – Surviving spouses still have favorable rules. For example, a widow can put the IRA account of her deceased husband in her name, take payouts over her life expectancy, and leave the account to younger heirs at her death, who then get a 10-year stretch.
  • Review IRA Trusts – Some IRA owners set-up trusts to receive assets at their death. With the new law, some types of IRA trusts no longer make sense, so people need to check.
  • Look into Life Insurance – The new law favors life insurance over IRAs as a tax-efficient way to move assets to heirs, because life insurance payouts can be free of both income and estate taxes.

The Secure Act brings many complexities and implications for investors, beyond the highlights covered here.  There is also an assortment of changes that potentially impact participants in 401(k) plans, annuities, and 529 plans.  Additionally, there are more options for new parents, part time workers, and workers with no access to workplace retirement plans.

These changes will require some investors to reevaluate their retirement and/or estate planning strategies.  A trusted financial advisor can help clients assess the changes and plan for their retirement years for years to come.

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