2020 has been a big year for change. With changing legislation and market volatility alongside battling a pandemic, our way of life has altered and adapted to fit our present circumstances.
While there have been many challenging aspects of this year, an important new piece of legislation has passed aimed at increasing the efficacy of retirement saving and planning: The SECURE Act.
What is the SECURE Act and how will it impact your retirement planning strategy? Let’s take a look and find out.
Breaking Down The SECURE Act
The Setting Every Community Up for Retirement Enhancement Act (SECURE) is a bipartisan bill that became law on December 20, 2019. Designed to provide aid to older Americans, this bill made some significant changes to tax-advantaged retirement accounts to help prevent people from outliving their retirement savings.
According to a study by AARP, 49% of Americans cited their biggest retirement fear is outliving their retirement savings. Further research has proven those fears have weight behind them. The U.S Bureau of Labor Statistics found that of those people who have access to workplace retirement plans (about a third of the population doesn’t) only 55% are taking advantage of it.
Beyond workplace retirement accounts, the general retirement savings picture isn’t any better. About a third of Americans have no retirement nest egg at all and many others are falling short of proper saving measures for their age and income level. This retirement saving crisis is nothing new, but it is something that the government is trying to rectify by making significant changes to workplace contribution plans and other retirement savings measures.
Strong financial planning is your friend in situations like these. Big changes in laws create unique planning opportunities to make the most of the changes and ultimately benefit from them.
SECURE-ing your retirement plan
In addition to altering provisions for establishing, administering and managing 401k plans, the SECURE Act has a number of other benefits for retirees, namely pushing back the age to start required minimum distributions (RMDs).
RMDs are mandated for every tax-deferred retirement account like a 401k or traditional IRA. The IRS stipulates that the account owner must withdraw a certain amount of money (calculated from the total account balance and owner’s life expectancy) each year. That money is taxed at the owner’s ordinary income rate and is a way for the IRS to begin collecting taxes on money that has been growing tax-free for years.
The age for starting RMDs has been 70 ½ and remains so for those who already reached that number before the end of 2019. The SECURE Act increased that age for everyone else to 72. This increase will help retirees save for retirement longer without having to incur taxes on their savings. It is important to note that with the passing of the CARES Act, all RMDs are suspended for 2020.
The SECURE Act has also eliminated age restrictions on contributing funds to an IRA. Before, once you began RMDs you were unable to contribute to the account. But now every person who earns an income can contribute to an IRA, further increasing saving measures for retirees.
The impact on estate planning
While the SECURE Act has provided many benefits for retirees, there is one key change that isn’t as popular. The Act has eliminated the stretch provision for inherited IRAs which allowed the beneficiary to withdraw funds from the account over their lifetime. The new rule stipulates that all funds must be withdrawn within 10 years of the account owner’s passing.
There are no specific RMD requirements for those 10 years, meaning the beneficiary can take out as much or as little as they would like but by the 10th year, the account must be liquidated. The elimination of the stretch provision causes some serious tax consequences. Many beneficiaries of inherited IRAs are in their peak earning years and could experience a spike in taxes as the money is taxed at their ordinary income rate.
If you were planning on using an IRA as a means of an inheritance, it might be best to alter that strategy for a more tax-efficient route. We advise caution around Roth conversions especially if a significant amount will go to the next generation. It is also important to check-in on your IRA account beneficiaries and ensure they are set up properly especially if one of those beneficiaries is a trust.
Maintain charitable efforts
While the SECURE Act has brought about many changes, one thing we still encourage you to do is hone in on your charitable giving. Charitable donations are an excellent way to help establish your legacy and receive important tax benefits.
How Strong Tower Can Help
Here at Strong Tower, our goal is for you to feel confident and secure in your retirement plan and a strong savings strategy is a big part of that equation. The SECURE Act has brought about many new changes that can add to your retirement plan and we want to help you implement those changes in thoughtful ways to maximize your assets and provide you with the retirement lifestyle you have always wanted. Many changes brought about by the SECURE Act impacts retiree’s tax obligations.
Our team is dedicated to assisting you in all aspects of your retirement plan including saving measures like 401k, IRAs, Social Security, and pension plans as well as how those assets will translate into your estate planning needs.
Even though times are changing and things seem unpredictable, remember that our team is strong and steady and will be there for you and your family each step of the way. Interested in learning more about how our team can help you? Set up a time to talk with us today.