Significant Retirement Plan Changes Are Here
The Setting Every Community Up for Retirement Enhancement Act, or SECURE Act which recently passed is one of the most significant pieces of retirement legislation in the last decade. Here are some of the key provisions contained in the SECURE Act:
- Increase Required Minimum Distribution (RMD) Age From 70 ½ to 72 – The SECURE Act pushes back the RMD age to 72 which gives retirees more flexibility on how to fund retirement. This only applies to individuals that did not attain age 70 ½ by the end of 2019. So, if you were age 70 ½ by December 31, 2019, you are still subject to the original required minimum distribution timing.
- Repeal of Maximum Age for Traditional IRA Contributions – The SECURE Act removed the age cap on IRA contributions allowing individuals working past age 70 ½ that have earned income to contribute to a traditional IRA or Roth IRA.
- The Stretch IRA Provision is Limited – The most detrimental tax change in the SECURE Act is the elimination of the stretch IRA for non-spouse beneficiaries. Other than a spouse, those who inherit retirement accounts such as IRAs, Roth IRAs, and 401(k)s are required to distribute the account over a 10-year period, rather than their lifetime, increasing withdrawals and thus total income taxes due on inherited accounts. Furthermore, the beneficiary can withdrawal the account anyway they want over 10 years (i.e. 10%/year, 100% in year 1 or 10, etc.), all that matters is it is completely distributed by year 10. This nuisance puts further onus on beneficiaries to tax plan to minimize the taxes.
So, what does that mean for you? Below are a few considerations:
- “Tax Planning” Across Multiple Generations – If you plan to leave money to kids or grandkids you should think about your tax rate as well as the beneficiaries’ projected tax rate to make a plan to minimize the family’s taxes. The RMD age being pushed back to 72 extends the opportunity for retirees to use potentially low tax rates from retirement until age 72 to proactively set up a withdrawal strategy that benefits their retirement as well as their heirs potential inheritance.
- Use an IRA for Charitable Giving – If you are charitably inclined and plan to leave assets to a charity at death, there is even more benefit now to have your IRA fulfill that desire thereby avoiding the income tax due on the distribution and eliminating the need to worry about the stretch IRA changes.
- Estate Plan Should Be Reviewed – Estate documents need to be reviewed to ensure they account for the limited stretch provision. If your trust document isn’t updated to account for the SECURE Act, existing trust language could restrict access to funds to heirs of trusts listed as IRA beneficiaries or cause large tax bills.
- Roth Conversions Are Still Valuable – While limiting the length for beneficiaries to “stretch” Roth IRA distributions reduces tax-deferred growth, there are still plenty of reasons to consider a Roth conversion now.
With the passing of the SECURE Act, we recommend that you meet with your BDF team to discuss the direct impact on your financial plan.
Matt is a wealth manager at BDF. He sits on BDF's Financial Planning Committee and leads many of the firm's tax-related initiatives. Matt has a passion for building strong relationships with his clients and helping them make sound decisions. He also holds the Certified Exit Planning Advisor designation which helps him advise business owners on how to exit their business and prepare for retirement.