Congress very recently passed the SECURE Act (Setting Up Every Community for Retirement Enhancement), which went into effect on January 1, 2020. The SECURE Act is the most significant piece of retirement-related legislation enacted in the last decade and affects everyone who has an Individual Retirement Account (IRA). Some of the changes under the new law are good, while others, namely the elimination of the “stretch IRA”, are not.
Elimination of Stretch IRA: The SECURE Act’s biggest impact – which is unfavorable – is the elimination of the “stretch IRA” for non-spouse IRA beneficiaries. Previously, having a stretch IRA allowed a beneficiary who inherited an IRA account to stretch RMDs over his or her own lifetime. Under the new law, however, all funds from an IRA inherited on or after January 1, 2020 must be distributed to any beneficiary other than a spouse within 10 years of the IRA owner’s death. What this means is those inheriting IRA accounts can no longer stretch out RMDs over their own longer lifespans and have IRA funds grow tax-free over many decades. While there are some exceptions to the new rule, the general elimination of the stretch IRA will likely upend the estate planning done by many IRA owners.
Traditional IRA Contributions After Age 70 1/2: Good news. Under the SECURE Act, IRA account owners are no longer prohibited from contributing to their traditional IRA accounts after age 70 1/2. Thus, those who continue working beyond age 70 ½ can contribute to a traditional IRA. As before, there are no age restrictions on contributing to a Roth IRA.
RMDs Now Start at Age 72: More good news. Before the SECURE Act, traditional IRA owners had to start taking Required Minimum Distributions (RMDs) at age 70 ½. An RMD is the required amount of money that an owner of a traditional IRA must withdraw from their IRA account each year; the amount is calculated based on an individual’s life expectancy. Now, traditional IRA account holders can wait to begin taking RMDs until age 72. Combined with the removal of age restrictions on contributing to a traditional IRA, being able to delay taking RMDs by another year-and a half can boost your IRA retirement savings.
If you have questions or need help determining how the SECURE Act impacts your estate planning – especially the elimination of the stretch IRA – please contact my office at firstname.lastname@example.org or (267) 728-1545.