Americans are poorly financially prepared for retirement, generally. Whether this is linked to lack of a funded savings plan, lifestyles that exceed income, an unanticipated drain on resources, Americans tend not to save appropriately for the later years. The issue often is so stressful that individuals choose to ignore it entirely.
A recent change to federal law should improve this situation though it will result in more taxes for some.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law in December 2019. The immediate effect will be on those nearing or in retirement, according to a recent Forbes article.
There are six ways the SECURE Act may impact individuals in their 50s or 60s preparing for retirement:
- Required Minimum Distribution (RMD) Relief for Retirement Plans
Before the law was enacted, individuals were required to draw funds from an Individual Retirement Account (IRA) or an employer-sponsored retirement plan by age 70.5. If, by the end of 2019, you did not meet that criteria, the SECURE Act moved the required minimum distribution (RMD) start date for most to age 72. This allows more time for IRAs and 401(k)s to grow without distributions and taxes reducing principal.
- More Roth IRA Planning Opportunities
Since RMDs begin at age 72, there is more time to make Roth IRA conversions without the effect of mandatory distributions. Unlike a traditional IRA, withdrawals from a Roth IRA are tax-free if specific rules are met and you haven’t had any RMDs. A Roth conversion could change taxable income in an IRA into a Roth IRA at lower tax rates now compared to what you may pay in the future.
- More Opportunity to Save
If you are retired but want or need to work part-time, the SECURE Act may provide for greater retirement funding flexibility. Previously, contributions to a tax-deductible IRA after the age of 70½ years old were prohibited prior to the SECURE Act. Now, contributions may continue until the age of 72. Those who reached 70½ years old by December 31, 2019 do not qualify.
Another provision of the law makes it easier and less costly for small businesses owners to create retirement plans for employees. It will also allow more small businesses to work together and offer Multiple Employer Plans (MEPs). This provision will become effective in 2021. In addition, beginning next year, the law will permit additional part-time employees to save through employer-sponsored retirement plans.
- Guaranteed Lifetime Income from Retirement Plans
The SECURE Act encourages employers with retirement savings plans to allow employees to change their investment into guaranteed lifetime income through annuities. The law will protect employers from lawsuits if the insurer they choose does not pay future claims.
- Why You Should Review Beneficiary Designations
The SECURE Act removed “stretch” provisions for IRA beneficiaries and defined contribution plans such as 401(k)s. Prior laws allowed beneficiaries of a traditional IRA to “stretch” out the RMDs over his or her lifetime, enjoying the tax benefits for what could be a long time. Now, most beneficiaries will need to distribute the entire inherited retirement account within ten years following the owner’s death. Surviving spouses, minor children and those less than ten years younger than the deceased will generally be exempt from this new rule. The SECURE Act law should prompt owners of retirement accounts to review their account beneficiary designations to align with the new beneficiary rules.
- Why You Should Review Your Trusts
Many individuals use trusts as beneficiaries of IRAs and 401(k)s. This “pass-through” feature in trusts allow the beneficiary to extend the tax benefits of an inherited account. The trust also helps manage the account and provides protection from creditors. Many of these trusts provide the beneficiary access to only the annual RMD.
Under the SECURE Act, most non-spouse retirement account beneficiaries must receive the funds by the end of the tenth year following the owner’s passing. If your IRA or employer-sponsored retirement plan such as a 401(k) names a trust as the beneficiary, you should take a look at the specific trust language to determine whether it still meets your goals.
Should you have questions about how the SECURE Act may impact your retirement savings or estate planning, contact one of our estate planning attorneys. We’ll be glad to answer your questions and address your needs.