The Setting Every Community Up for Retirement Enhancement (SECURE) Act is bipartisan retirement legislation that was signed into law on December 20, 2019 and became effective January 1, 2020. The SECURE Act represents the most significant legislative change to the United States retirement system in over a decade so we thought we would give you all some of the more pertinent changes. This is not a list of everything, but for the vast majority of clients this is what we felt were most relevant.
Traditional IRA Required Minimum Distribution (RMD) age increased to 72
The age 70½ trigger for taking an RMD has been raised to age 72 for individuals who attain age 70½ after 2019. An individual who attains age 70½ in 2019 will need to take RMDs for 2019 and 2020, even though he or she may not attain age 72 until 2021. However, an individual who turns age 70 ½ in 2020 will not be required to take an RMD until he or she turns age 72, which could be in 2021 or as late as 2022. 1
"Stretch IRA" restrictions
The Act provides that, upon the death of an IRA owner, the designated beneficiary is required to draw down his or her entire inherited interest within 10 years. The 10-year rule does not apply to any portion payable to a surviving spouse, who would be allowed to “stretch” the post-death distributions over life or a period not exceeding their life expectancy. Therefore this applies to non-spouse beneficiaries such as children and grandchildren to name a few. There are also different rules for minors and disabled beneficiaries. These restrictions apply to deaths after 2019. It does not matter when the actual Beneficiary IRA account is established.
Post 70½ contributions to traditional IRAs
The Act repeals the current prohibition on contributions to traditional IRAs after the owner attains age 70½ as long as the owner has earned income equal to or in excess of the contribution amount. This change is effective for taxable years beginning after 2019. The age restriction will still apply to 2019 tax year contributions made on or before April 15, 2020, but not to 2020 tax year contributions. This only applies if you have earned-income and you are older than 70½. If you meet both requirements, you can now contribute to your IRA again.*
*If you own a SEP IRA, you were already able to do this.
Penalty-free distributions upon the birth or adoption of a child
The Act permits a defined contribution plan (i.e. 401(k)) participant or IRA owner to withdraw up to $5,000 penalty-free upon the birth or adoption of a child, for distributions after 2019. This provision adds to an existing list of penalty-free distributions already allowed. Note that it allows you to get the money out penalty-free (10%); however, there is no avoiding regular income taxation of any pre-tax money.
If you have additional questions or concerns, feel free to reach out to Cameron or Ben. If you are a client, we will be adjusting your plans in future meetings. Happy New Years everyone! Please keep on the look out for our 2020 market outlook being published this week.
Cameron Valadez is a CFP® Practitioner.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
The information presented is solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy any financial product or service mentioned. Waddell & Reed does not provide legal or tax advice. Please consult a professional prior to making financial decisions.
1 Jackson National Life