Three Big Takeaways from the SECURE Act

Congress gave retirement savers a gift and some lumps of coal in the SECURE Act that was signed into law this week. While the proposed Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed in the House a few months ago, it was not passed by the Senate until December 19, 2019 when it was attached to a year-end appropriations bill that Congress passed in order to keep the government up and running. This act had several changes that will impact taxpayers and retirees, but in this blog post I’d like to focus on three big changes affecting most retirement savers.

  • Required Minimum Distribution Age Change

Under current law most people are required to take money out of qualified accounts such as IRAs and 401(k)s beginning the year they turn 70 ½. The SECURE Act changes this by delaying required minimum distributions (RMDs) to age 72. This only applies to individual turning 70 ½ after December 31, 2019. Anyone turning 70 ½ before December 31, 2019 will still be required to take RMDs under the existing rules.

  • No Age Limit for IRA Contributions

Under current law, once an individual turns age 70 ½ they are no longer allowed to contribute money to their IRAs, even if they are still working. An unfortunate reality is that many people are now working past age 70 ½ and may need or want to continue adding funds to their retirement accounts. For this reason, the SECURE Act has eliminated the age limit for contribution to IRAs. Now, individuals may make IRA contributions at any age, provided they have earned income.

  • No More Stretch

Perhaps the biggest change from the SECURE Act is also the least favorable to taxpayers – the elimination of the “Stretch” IRA. Under current rules, when an individual inherits an IRA they have the option to take RMDs based on their own life expectancy and thus “Stretch” the life of the IRA over their own life expectancy Under the new rules specified in the SECURE Act, individuals who inherit an IRA will be required to distribute the entire account within 10 years. There are some specific exemptions to the 10-Year Rule including:

  • Spousal beneficiaries;

  • Disabled (as defined by IRC Section 72(m)(7)) beneficiaries;

  • Chronically ill (as defined by IRC Section 7702B(c)(2) with limited exception) beneficiaries;

  • Individuals who are not more than 10 years younger than the decedent;

  • Certain minor children (of the original retirement account owner), but only until they reach the age of majority.

The elimination of the stretch IRA applies to anyone inheriting an IRA after December 31, 2019 and not meeting one of the above exemptions.

While there are several other changes enacted by the SECURE Act, we’ve highlighted what we feel are the major ones for retirement savers. These changes provide some unique opportunities when planning for retirement so, as always, please contact your financial and/or tax advisor to discuss how these changes might affect you.

Alpha Omega Wealth Management does not provide tax, accounting, legal or insurance advice, but can make suggestions, which you can review with your expert advisors, or refer you to a specialist, who does not compensate us for the referral. You should consult your own tax, accounting, legal and insurance advisors before engaging in any transaction.