On December 20, 2019, President Donald Trump signed the SECURE Act into law. The SECURE Act, or “Setting Every Community Up for Retirement Enhancement Act,” offers several major adjustments to how we save, prepare for and enjoy retirement. Whether you’re nearing retirement or already enjoying financial freedom, there are two big rule changes the SECURE Act will affect - the former concept of a “Stretch IRA” and required minimum distributions.
Change #1: Reduction of the “Stretch IRA”
With the right estate plan in place, people have had the ability to transfer an IRA account to a beneficiary after their passing. While we’re still able to do so, one major change after the passing of the SECURE Act is affecting our beneficiaries in a big way.
If someone has died before December 31, 2019, the inheritor can choose to take withdrawals from the account over the remaining span of their life expectancy. This offers the beneficiary a chance to minimize their yearly tax obligation by receiving smaller amounts over a longer period of time.
With the recent SECURE Act changes, this concept of a “stretch IRA” (meaning the withdrawals are stretched over a lifetime) is eliminated for some. For those who have died after December 31, 2019, their beneficiaries are now required to withdrawal the entirety of the account within 10 years of inheriting the account.1 For most, this means withdrawing larger sums of money during a smaller period of time - leading to a higher yearly tax obligation. Depending on the amount, these withdrawals could even push a beneficiary into a higher tax bracket.
It’s important to note, however, that there is no limitation to how the money is distributed. For example, you could choose to withdrawal the entire amount during year 9, say when you yourself reach retirement. Or, you could evenly withdrawal the amount each year for 10 years. If you find yourself in this position, you may want to work with a trusted financial partner to discuss the most effective withdrawal strategy for you.
Exceptions to the Change
There are certain individuals who are exempt from this new 10-year rule. The spouse of the deceased, for example, can continue withdrawing from the account over the remainder of their lifetime.
Others who are exempt from this rule include:
- Beneficiaries who are disabled or chronically ill
- Minors (unless it is a grandchild of the deceased)
- Those who are less than 10 years younger than the original account owner (for example, a sibling)1
Change #2: Required Minimum Distribution Age
Before the SECURE Act passed, the required minimum distribution age was 70 ½. That means that for anyone who turned 70 ½ in 2019 and before is required to withdraw the minimum amount from their retirement accounts, such as a 401(k) or IRA. With the new law in place, that age has jumped to 72.1 While it doesn’t sound like much of a difference, that 18 months of additional saving and delayed withdrawal can create a significant impact on your retirement account. Plus, this allows retirees to delay the tax obligations of withdrawing this income from their accounts.
If you haven’t already, it may be beneficial to give us a call at 330-836-7000 to schedule a meeting to learn how the recent changes of the SECURE Act may affect your own retirement strategy.
Since 2004, TCM Wealth Advisors has been providing Fee-Only Fiduciary Advice to our clients in Northeast Ohio and all across the country.