The “Setting Every Community Up for Retirement Enhancement” (SECURE) Act passed the U.S. House of Representatives last May, passed the Senate a few days ago in December 2019, and then was signed by President Trump. It is among the few bipartisan bills that have been signed into law. It is being called the most comprehensive, sweeping retirement security legislation in recent history and is now the law of the land.
Impact of the SECURE Act on Retirement Planning
If you are close to retirement age or are in retirement already, there are three major components of this legislation that may effect you and your beneficiaries.
RMD Age and Contribution Age Extended
With the passing of The SECURE Act, people working beyond age 70 1/2 will be allowed to make contributions to their IRAs. This is in addition to contributing to Roth IRAs and 401(k) plans.
The Act also delays the age when people will be required to start taking distributions out of their IRAs (called required minimum distributions, or RMDs) from age 70 1/2 to age 72.
NOTE: This is for those who have not turned 70 1/2 by the end of 2019. If you turned 70 1/2 in 2019, you will have to take your RMD by April 2020.
2. Stretch IRAs Removed
The Act will change the rules for people who inherit an IRA or other retirement vehicle.
Previously, inheritors were given their lifetime to withdraw RMDs based on their age. This was known as the “stretch” IRA. Inheritors could enjoy tax-free compounding of the money they were not required to take out.
The new rules will require a full payout from the inherited IRA within 10 years of the death of the original account holder —and all ordinary income taxes would be due at the time of the distribution.
NOTE: As a result, many tax practitioners are recommending that wealthier individuals look at the possibility of doing partial Roth conversions while they’re still alive.
Converting some of the traditional IRA assets into Roth IRAs would allow the beneficiary to eliminate all tax on the inherited Roth. Especially those in lower tax brackets should consider a conversion.
Remember that the Tax Cuts and Jobs Act of 2017 lowered income tax rates. After 2025 rates will increase. Check with your tax advisor to consider if a conversion would make sense for your beneficiaries.
This is biggest major retirement legislation in a decade, but is it enough to be a game-changer for the American retirement system? We shall see.