The SECURE Act: What You Need to Know

In 2020, the SECURE Act, or the “Setting Every Community Up for Retirement Enhancement” Act, went into effect. This new government spending bill will impact both current retirees and pre-retirees who are currently in the process of building their retirement savings. 

SECURE Act Changes

Several changes were made as a result of the SECURE Act. These include:

  • Small business owners can now more easily set up “safe harbor” retirement plans
  • Part-time workers may now be eligible to enroll in their employer’s retirement plan
  • Retirees can now continue to contribute to their IRAs beyond age 70½ 
  • The age where RMDs kick in for retirement accounts has increased to 72 from 70½ 
  • Rules around the distribution of inherited IRAs have shifted for non-qualified beneficiaries
  • 401(k) plans can now offer annuities

Let’s explore a few of the key changes that will have a dramatic impact on the ways you prepare for retirement, and set up your estate plan. 

Increasing The Age for RMDs

One of the first changes you should pay attention to is the increased age for Required Minimum Distributions (RMDs). Previously, if you were age 70 ½, you were required to start taking RMDs from your tax-advantaged retirement accounts like a 401(k) or Traditional IRA. As a result of the SECURE Act, you now aren’t required to start taking your RMDs until age 72. 

Of course, you can still take distributions early if your retirement income strategy requires it. However, there’s now more flexibility in how retirees can build a tax-efficient retirement income strategy. This update gives retirees the ability to extend the life of their savings if they choose to delay their RMDs. 

IRA Contribution Restrictions Removed

Additionally, you can now contribute to a tax-deferred account beyond age 70 ½, which wasn’t previously possible. This is beneficial for pre-retirees who are continuing to work in some capacity into their 70s because they can continue to contribute to their IRA to boost savings and reduce taxes for when they do decide to make the leap to full-time retirement. 

Considering the majority of pre-retirees are planning to either continue working beyond traditional retirement age in some capacity or are pursuing a second career in retirement, this update to IRA contributions is a “win” for many. The ability to continue to increase your IRA savings gives your nest egg extended life, and could positively impact long-term legacy building goals you have. 

Distribution of Inherited IRAs

Another update from the SECURE Act is the revision of how inherited IRAs are distributed to the beneficiary. Previously, if a non-spouse beneficiary inherited an IRA from a deceased loved one, they were eligible to “stretch” distributions from that account over their life expectancy. 

However, for most designated beneficiaries who inherit in 2020 and beyond, the new standard under the SECURE Act will be for beneficiaries to empty their inherited accounts within 10 years. Within that 10-year period, beneficiaries can empty the account, or take distributions, whenever they so choose. 

This has tax implications, as beneficiaries will need to plan when they want to take distributions from their inherited IRA in a tax-efficient way. Coordinating distributions in a year where you have a larger number of tax deductions, or a lower overall income, to offset the income received from your inherited IRA will be beneficial.

Additionally, retirees setting up their estate plans should also consider this updated rule when passing on their IRAs. The last thing you want to do is gift an IRA, only to have it hurt your loved ones by dramatically increasing their tax bills. 

There are a few exceptions to this new rule. Spousal beneficiaries, chronically ill beneficiaries, disabled beneficiaries, individuals who are 10 years younger or less than the deceased, and certain minor children all qualify as “eligible beneficiaries” who sidestep the new 10-year requirement. These individuals can still take distributions over the course of their lifetime.

Have Questions?

If you have questions about the SECURE Act, and how it impacts your retirement planning, we’d love to talk to you. Schedule a call with us by clicking here. 

Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs, and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.

"Finance Made Simple" blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.

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