This new law is the biggest change to retirement accounts in a decade
Just before the end of 2019, a little thing called the Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed into law as part of the end-of-year appropriations bill. Most of the SECURE Act’s provisions went into effect on January 1, 2020 and most of us in the industry are still getting our clients up-to-speed on how the act affects their financial lives. In addition to having a snappy acronym for a name, the act significantly impacts retirees with IRAs, families with children (or those planning for children), and those who are inheriting IRAs. We’re covering all three groups in a series of short blog posts this February.
Let’s start with retirees—or potential retirees—who have IRAs. Before the SECURE Act, you had to start withdrawing an annual Required Minimum Distribution (RMD), starting at age 70 ½ .
The IRS calculates this RMD by dividing your IRA’s balance by a “distribution period” number assigned to your age (a rough guess of your life expectancy). For example, 70-year-olds divide by 27.4, 71-year-olds divide by 26.5, 72-year-olds divide by 25.6, and so on up to 115 (!) at 1.9. This system was devised to keep people from using their IRAs as a perpetual tax shelter.
But with the new SECURE Act, IRA owners get a short reprieve before having to start withdrawing RMDs: Account owners can now wait until age 72 to begin taking Required Minimum Distributions from their IRA.
In addition, the SECURE Act removes the age limit for contributing to an IRA. Previously, account owners couldn’t contribute past age 70 ½ . Now, you can contribute to your IRA as long as you have earned income (not income from interest or investments), no matter if you’re 70 ½ or 115. As before, there are annual contribution limits. In 2020, people under 50 can contribute up to $6,000 into an IRA; those over 50 can contribute up to $7,000.
These changes take into account trends of both longer active careers and longer life expectancies. More good news: The SECURE Act didn’t change the age limits for Qualified Charitable Distributions. Beginning at age 70 ½ , generous IRA account owners can still transfer all or part of their RMD amount to a charity tax-free. You just aren’t required to make minimum distributions (whether you keep it or give it away) until age 72 now.
Have questions about how the SECURE Act affects your current savings strategy or giving plan? Make an appointment to talk all-things-IRA with one of our wealth advisors.