The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) was signed into law on December 20, 2019 by President Donald Trump. This new federal law significantly changes the landscape for retirement account planning. Here are some major changes that could impact your estate plan:
- Most non-spouse beneficiaries cannot stretch distributions over their life expectancy.
Old rules: Prior to January 1, 2020, beneficiaries of inherited IRAs could take distributions over their life expectancy – which often provided a longer period of time to stretch out the tax-deferred advantage of the account.
New rules: Under the new rules, only an eligible class of beneficiaries can stretch distributions over their lifetime. This class includes:
- Your spouse
- Minor children of the account owner
- Disabled beneficiaries
- A chronically ill beneficiary; and
- A beneficiary who is not more than 10 years younger than the account owner.
All other beneficiaries are now required to fully take distributions from the inherited IRA account within 10 years of the accountholder’s death. This shorter time period can result in some significant tax bills.
In light of this, consider reviewing your estate plan to reevaluate your retirement and estate planning strategies. If you made beneficiary designations under the prior laws, it may be wise to consult with an estate planning attorney to see if modifications need to be made.
2. The maximum age for traditional IRA contributions is repealed.
Old rules: Prior to January 1, 2020, the maximum age to make contributions to traditional IRAs was 70 ½. Indeed, you could not make contributions during the year in which you turned 70 ½ or any year thereafter.
New rules: The new legislation repeals the age restriction on worker contributions to traditional IRAs. This will provide a valuable tax deduction and enable you to save more for retirement. As Americans work and live longer, this additional amount of time to save for retirement will be extremely beneficial.
3. The age when retirees must take Required Minimum Distributions is now increased.
Old rules: Prior to January 1, 2020, you were required to start taking withdrawals from a traditional IRA by April 1 of the year after you turned age 70 ½. These withdrawals are known as required minimum distributions.
New rules: The SECURE Act increases that age limit to age 72. This change gives you more time to let the investments in a retirement account grow tax deferred.
4. New parents can take penalty free withdrawals.
Old rules: Prior to the new law, if you took a withdrawal from your IRA or 401(k) before age 59 ½, the amount would usually be subject to income tax and a 10% penalty. The IRS did make some exceptions to this for penalty-free early distributions from some types of retirement accounts for specific circumstances involving hardship, such as an expensive medical emergency or to purchase health insurance after a job loss.
New rules: The SECURE Act adds an additional exception to this list. You are now allowed a $5,000 withdrawal from an IRA or 401(k) after the birth or adoption of a child. It’s a good idea to consult with an estate planning attorney to ensure you meet the conditions necessary to take advantage of this new option.
Want to ensure your needs and goals are being met after the passage of the SECURE Act? Call us at (312) 584-8852 or email us.