What Changes Should You Know About From The Passing Of The SECURE Act?

Late last December, the SECURE Act was signed into effect by President Trump. This legislation made changes to retirement. So what are some of these changes?

For those that are planning for retirement, nearing retirement, or are retired and close to turning 70, this article will have information that you will want to know.

One of the most significant changes is regarding the required minimum distributions (RMDs). Until last year, those who turned 70 and a half needed to take a certain amount of money (determined by the IRS) from their retirement accounts. This is why many people decide to wait until 70 and a half to take money out from some of their retirement accounts, such as their 401(k) or TSP. However, with the new SECURE Act in place, you can delay taking your first RMD until you are 72.

For the seniors that turned 70 and a half last year in 2019, you must take your first RMD by April 1st of 2020 and will need to continue taking your RMDs. For those that are not 70 and a half until this year, 2020, you can push off taking your first RMD until you are 72 years old.

Accounts that must have RMDs include IRAs, 401(k)s, 403(b)s, 457 accounts, TSPs, and Roth TSPs.

Those that have a Roth IRA are exempt from taking RMDs from this type of account.

Another change is that the Stretch IRA has been eliminated. The stretch IRA was a strategy that enabled beneficiaries of IRAs to stretch their tax liabilities throughout their lives. The beneficiary would leave their inherited funds within the IRA they inherited, which let them separate their distributions out throughout their lifetime. This strategy had the tendency to have the Beneficiaries pay less in taxes, and their assets within the account would still be growing in value.

However, since the new legislation has been passed, beneficiaries must take out all their assets from the inherited IRA within ten years. The disabled, children that minors until they are 18, Beneficiaries that are a maximum of 10-year younger or less, and spouses may be exempt from this rule.

Before the SECURE Act, you were not allowed to make contributions to an IRA if over the age of 70 and a half. Now, with the new law, anyone that has earnings can contribute to an IRA as the age limit has been removed.

The SECURE Act now lets new parents that adopted or had a child make their own respective withdrawals of up $5,000 from their retirement plans without being liable to pay the 10 percent premature withdrawal penalty. Hopefully, this new change will help new parents with having a new addition to their family unit.

Though this can be handy, it is advised not to make a withdrawal unless it is the only way as this can negatively impact your account’s compound interest in the long run.

There are also changes that affected 529 plans. These accounts are for owners to save up and pay for educational costs. However, now withdrawals (at a limit of $10,000) can be made from these accounts to pay down student loans.

So what are some of the effects of these changes that we need to consider?

Those that will be heavily impacted will be the beneficiaries that can no longer implement the stretch IRA method. Before, many were able to drag out the time period of taking money from their inherited accounts, which allowed them to stay in a tax bracket that allowed them to pay less in taxes. However, now that there is a limit of 10 years for the assets to be withdrawn, many beneficiaries may face paying taxes at a higher rate as they are pushed into a higher tax bracket.

Due to these changes from the SECURE Act, planning is very critical for those that plan to pass down their wealth to their heirs or those that will not take RMDs until they legally have to.

Those that will delay their first RMD until they turn 72, it is crucial to understand Roth conversions. This is because Roth IRAs are exempt from RMDs as taxes have already been paid on the money put into the account. Your heirs will be able to inherit this account tax-free as well.

If you plan to pass down your wealth, make sure you keep in mind the tax bracket your beneficiary is in and what bracket you are in as well because, depending on the situation, it may be better to roll your assets into a Roth.

In general, be sure to review your financial situation and how some of these changes may impact you so that you can act accordingly.