In December 2019, Congress passed the SECURE Act which is the first major change to retirement legislation since 2006 with the passage of the Pension Protection Act. The passage of the SECURE Act will affect retirement savers in a number of ways from changes to IRA contributions, Required Minimum Distributions, availability of annuities within workplace retirement plans, and so on. We have outlined a few of the major changes that may impact you or beneficiaries of your retirement accounts.
Traditional IRA Contributions
Before the passage of the SECURE Act, once you reached age 70.5 you could no longer contribute to a traditional IRA even if you still had earned income. Now, you can continue to contribute to a traditional IRA beyond age 70.5 provided you still have earned income. This is a nice change considering that more Americans are working longer, and many are working into their 70’s. It’s also important to note that it was only traditional IRA contributions that were previously age capped. For example, Roth IRAs and workplace retirement plans like 401(k)s did not place an age limit on contributions.
Required Minimum Distributions
If you have any kind of retirement account, age 70.5 has probably stuck out in your mind as an important age. That’s because prior to the passage of the SECURE Act, age 70.5 was the age when typically you needed to begin taking withdrawals from your tax deferred retirement accounts and paying applicable taxes owed. There were a few exceptions to age 70.5 that we won’t get into in this article, but for the most part, age 70.5 was an important age for retirement savers. With the passage of the SECURE Act, anyone who has not reached age 70.5 by the end of 2019 can now potentially push back the start of their Required Minimum Distributions (“RMDs”) from tax deferred retirement accounts until age 72 (again, there are a few exceptions to this that we won’t discuss in this article). This can allow for a few extra years of tax deferred savings and growth within the account.
The “Stretch” IRA
Unfortunately, in order to be able to push back the starting age of RMDs for retirement accounts, some things had to change. The SECURE Act does away with the lifetime distribution option for non-spouse beneficiaries of retirement accounts. Prior to the passage of the SECURE Act, a non-spouse beneficiary of a retirement account could elect to move the assets into an inherited IRA (or inherited Roth IRA) and take out annual required minimum distributions based on a life expectancy table produced by the IRS. This was particularly advantageous to younger beneficiaries who could withdrawal the minimum required each year and keep the bulk of the account tax deferred and growing over a long period of time (potentially decades). Now, with the passage of the SECURE Act, most non-spouse beneficiaries of retirement accounts will be required to completely withdrawal the account within 10 years (and pay all applicable tax owed).
Retirement Plan Changes
The SECURE Act will make it easier for plan sponsors of workplace retirement plans to offer annuities inside of retirement plans. The SECURE Act also makes a few changes to the rules regarding employee eligibility for participation in employer-sponsored plans. Part-time workers who may not have worked enough hours previously may find they are now eligible to participate under the new rules in the SECURE Act.
Like most changes, the new SECURE Act offers both some advantages and some disadvantages to investors and their heirs. The important thing is to be aware of how some of the significant changes may affect your personal financial planning and if there are any changes or adjustments that should be considered.
Gary E. Croxall, CFP®
Registered Principal of LPL
Soren E. Croxall, CFP®, CFA
Registered Representative of LPL
Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. LPL Financial and Croxall Capital Planning do not provide tax or legal advice. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.