Legislation that passed Congress at the end of 2019 makes three significant changes to the way you can contribute to and withdraw from your IRAs.
The changes in the Setting Every Community Up for Retirement Enhancement Act of 2019, or SECURE Act, make it worthwhile for everyone with IRAs to re-evaluate their retirement savings strategies. Our clients receive ongoing advice as part of our comprehensive financial planning process. If you’d like more information on how we can help you, contact one of our advisors today.
What are the changes?
First, the act delays the age at which you are required to begin making annual withdrawals from an IRA. Now you’re required to make so-called required minimum distributions once you hit age 72, which is up from the previous age 70½.
The impact of this is straightforward: Assuming markets cooperate, you’d have more money in your retirement account before you must begin making mandatory annual withdrawals. This advantage of potentially having a larger account balance could last throughout your retirement.
The second change involves contributions to your IRA. Previously, you generally couldn’t contribute to a traditional IRA after reaching age 70½. Now you’re allowed to make continued traditional IRA contributions after age 70½ if you continue to work and have earned income from wages or from owning a business. You also could contribute to a spousal IRA for a retired spouse if you meet certain income requirements.
Again, the impact of this is simple: Your retirement nest egg can last longer if you’re able to accumulate retirement funds over a longer period.
These two changes proposed in the SECURE Act are viewed as positive. But, as always, when the government giveth the government also tends to taketh away.
The SECURE Act requires non-spouse heirs who inherit an IRA to withdraw all money from the account within 10 years. Previously, you could stretch out withdrawals over your life expectancy, based on actuarial formulae.
Withdrawing all inherited money within 10 years could create much larger tax liabilities than originally envisioned. So this change may require new planning strategies for heirs who want to avoid a tax hit. Not everyone will be affected in the same way, but it makes sense to review your situation and make changes if necessary.
Fortunately, the act offers some exceptions to the 10-year rule. These include surviving spouses as well as chronically ill, disabled or minor heirs, as well as heirs who are less than 10 years younger than the decedent. The 10-year rule would affect minors once they become 18 or 21 years old, depending on their state of residence.
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