Lawmakers in Washington are providing some essential tools to those trying to put together a financial plan for their retirement, Motley Fool reports, in its recent article entitled “3 Ways the SECURE Act Could Make You Replan Your Retirement.” However, in the process, our legislators can also throw a curve ball into the existing legal system. This may provide new opportunities for savers but also may create pitfalls for the unaware. As a result, it’s important to know the three primary ways that the SECURE Act will change the way you think about retirement.
- Delaying RMDs from IRAs and 401(k)s until age 72. Many Americans use IRAs, 401(k)s, and other tax-favored retirement accounts to help them save for retirement. These accounts offer deferral on any taxes generated by the investments within the account,s until the funds are withdrawn in retirement. However, Congress didn’t want people to be able to defer taxes on their retirement savings forever, so they created a system of required minimum distributions (RMDs). Under current law, most people have to start taking withdrawals from IRAs and 401(k)s beginning in the year they turn 70½. The distribution amount is based on the person’s life expectancy, so that they gradually use up the retirement account balances over time.
The SECURE Act changes the age at which people are required to take RMDs to age 72. This allows people some extra time before dealing with RMDs and also eliminates the complication of dealing with a half-birthday. You can withdraw money from your retirement accounts at age 70½ if you want to, but the legislation lets you make the choice.
- Allowing IRA contributions after age 70½. Under current law, people can’t make IRA contributions once they reach 70½, despite still working. Congress again didn’t want people to keep adding to their retirement accounts, when they were already past a typical retirement age. However, in reality, many people still work after age 70½. Therefore, allowing them to set money aside in a tax-favored way is only fair. That’s why the SECURE Act’s changed the age to allow further IRA contributions.
- Forcing faster withdrawals from inherited IRAs. The third change isn’t as favorable: to help pay for the tax impact of these changes, Congress decided to curtail the rules that let those who inherit retirement accounts to stretch out distributions over their entire lifetimes. The new legislation would still let spouses treat an inherited account as if it belonged to the spouse, but non-spouse beneficiaries would have to take distributions within 10 years.
With this change, you should review your estate planning to see if changes are necessary to reach the best possible outcome. Ask your estate planning attorney to go over these changes and how they may have an impact upon your estate plan.
Reference: Motley Fool (Dec. 19, 2019) “3 Ways the SECURE Act Could Make You Replan Your Retirement”