Some Ways That the SECURE Act May Affect You by Bill Hoff
The SECURE Act (which was passed into law in December of 2019), and a majority of its provisions have already started at the beginning of the year. Let’s take a look at how some of these new changes may affect you.
One significant change is on inherited retirement accounts, as the time period to deplete the account has been limited to 10 years. Before this year, beneficiaries that received a retirement account, such as a 401(k), IRA, or Roth IRA as an inheritance, had to take yearly distributions throughout their lifetimes.
This allowed many the opportunity to lay out their tax burden over decades as most IRAs pay out income considered as ordinary taxable.
With the SECURE Act in place, those that receive a retirement account as inheritance must empty the account balance within ten years of the original account owners passing. In other words, for deaths in 2020 and on, the deferred income taxes on the retirement accounts of the deceased will be completely paid within ten years.
There is also no longer a requirement to take annual distributions as long as the account is completely emptied by the 10th year. This allows the beneficiary to withdraw the inheritance during a year where earnings may be lower than usual. This could be due to being in between jobs or retirement. However, there are exemptions for certain situations.
If it is a surviving spouse that inherited a retirement account, they are exempt from the 10-year limit. They can keep the money in the account under the deceased’s name and receive distributions based on the deceased’s age. They can also roll the balance over to an account in their own name and withdraw the minimum required distributions throughout their life span.
Those that have mental or physical disabilities are exempt from the new rules as well and can continue taking yearly distributions throughout their lifetimes. Also, beneficiaries that are not more than ten years younger in age than the deceased are able to continue under the old rules as well.
In some cases, there are children of the deceased that are underage that can take yearly distributions based on how long they are expected to live until they are of age. Then they will need to abide by the new rules and deplete the account within ten years. Those that are exempt from the 10-year limit will need to use the same required minimum distribution (RMD) tables by the Internal Revenue Service before the new law came into effect.
You can review these RMD tables at IRS.GOV.
For those that have retirement accounts with trust beneficiaries, be aware. Many do this because they wish to safeguard their assets from being stripped away from credits or from being misused. The language used in these trusts may have your assets liable for higher taxes instead of lower tax rates over a span of years. This is why it is crucial to understand what all the trust setup entails if you elect it as the beneficiary.
In 2022, a provision will go into effect, which will include a special delay for certain annuities, 403(b) accounts, 457 accounts, and collective bargaining agreements.
Another change under the SECURE Act is changing the age limit to start taking yearly RMDs. It has been increased to age 72 from 70.5. When you become 72 years old, you will need to start taking these RMDs. The same calculation formulas by the IRS and rules still apply.
For some, RMDs can impose a problem as it may put them at a higher tax rate. However, for those that are charitably inclined, they are still able to donate up to $100,000 directly from their retirement account to their causes of choice, which is tax-exempt.
Due to the SECURE Act, there is no longer a maximum age limit preventing people from contributing to their IRAs. Before, once you reached 70.5 years of age, you were no longer able to make contributions. This will allow those that choose to continue working well into their 70s to still make contributions to their retirement savings.
The last change we will cover is one that will help annuities become a more popular option within workplace sponsored retirement plans than it currently is now. Though annuities have been available in workplace retirement plans, it has mainly been passed on because of expensive fees and the vulnerability to liability.
Under the new law, if fiduciaries adhere to specific rules and tests, there have been safe harbor provisions added to protect fiduciaries. This change will provide more opportunities to offer lifetime income options as a payout. Keep in mind that there are more changes due to the implementation of the SECURE Act, which affects medical expense deductions, retirement planning for businesses, kiddie tax, and 529 plans.
If you believe one of those matters will affect you in some way, be sure to do more research on the SECURE Act to ensure that you know all you need to. Also, it may be in your best interest to work with a financial professional to see how the new rules may affect you.