Every now and then, legislation is passed that alters the retirement savings landscape. The Setting Every Community Up for Retirement Enhancement Act (SECURE Act), signed into law on December 20, 2019, represents the first major piece of retirement legislation passed in a decade. Like many people, you are probably wondering what this means for you.
The resulting legislation affects many people, both working and retired, in a variety of different ways. Let’s take a look at some of the key takeaways stemming from the passage of the act. Please note that this is not a comprehensive list of changes.
- Required Minimum Distributions (RMDs) Now Begin at Age 72
Americans are living longer. As a result, people are working later in life and need their nest egg to last many more years. If you turn 70.5 in the calendar year 2020 or later, your RMDs now start in the calendar year in which you turn 72. For those of you who turned 70.5 in 2019 or earlier and are taking your RMDs, you should continue to take them.
- Elimination of the Age Cap for IRA Contributions
Prior to the SECURE Act, individuals were not allowed to make contributions to an IRA after age 70.5. The new law has lifted that age restriction so individuals can continue contributing after age 70.5, provided they have earned taxable income. This repeal applies to contributions made in 2020 and later
- Change to the Lifetime Stretch Feature for Non-Spouse Beneficiaries of IRAs and 401(k)s
The SECURE Act changes the options available to non-spousal inheritors of retirement assets. Prior to the SECURE Act, an inheritor could “stretch” distributions, and subsequent tax payments, from IRAs or 401(k)s across their single life expectancy in the form of annual required distributions (similar to the functioning of an RMD). Now, those distributions, which were once spread out over a lifetime, have a 10-year window in which all of the inherited funds must come out of the inherited IRA or 401(k). There is no longer an annual amount that must come out of the account, but all funds must be removed from the account by the end of the 10-year window. There are exceptions to the 10-year window so for those of you who have plans in place for your beneficiaries, meeting with your financial advisor to discuss the ramifications of these changes and potential adjustments may make sense.
*Please note that this new rule does not affect anyone who inherited an IRA or 401(k) from an individual who was deceased prior to the 2020 calendar year.
- Additional Investment Options Within 401(k)s
For those of you still working, the SECURE Act opens the door for additional investment choices inside your 401(k) that could provide lifetime income options, such as annuities. This may be beneficial as Americans continue to live longer and fuller lives in retirement. However, annuities can be complex products, and not all of them are built equally. Employees should consult with their financial advisor to discuss the suitability of available options.
Note that these are just a few of the changes resulting from the passage of the new legislation. The SECURE Act has many additional components to it that may or may not affect your retirement situation. If you have any questions, please reach out to us at (715) 832-1173.