By now, you may have heard about a new change to our tax law that Congress included in the most recent budget called the SECURE Act, an acronym for “Setting Every Community Up for Retirement Enhancement.” With a name like that, it’s received quite a bit of attention and curiosity, and rightfully so. Some people say it’s yet another money grab by the government. Just another way for them to get more money to spend. I’ll spare you my opinions as much as possible, as there’s plenty of other places on the internet to get that. Instead, let’s focus on the some of the provisions that are most likely to impact you. (Disclaimer: This isn’t an exhaustive list. Consult your tax professional or financial advisor for more details or specific questions.) One more thing, the SECURE Act effects employers and small businesses, too. It can be a bit more complicated, and irrelevant to an individual. So for this post, I’m only talking about how the act may effect individuals. Ok, let’s go…
SECURE ACT for Individuals
The Act makes changes to the way you might think about your financial planning as an individual, and there are three changes I really want to focus on, as I believe they have the potential to affect the most people:
- The RMD age has changed for some. The SECURE Act moves the age for your required minimum distribution (RMD) from 70 ½ to 72. This change effects people who turn 70 ½ after December 31st, 2019. As an example, if you turned 70 ½ on February 1st, 2019, this rule doesn’t apply to you. But, if you’re turning 70 ½ on February 1st of this year, (2020,) you qualify under this new provision. Keep in mind; It doesn’t mean you can’t take money out of your IRA. It just means you don’t have to until you turn 72.
- The birth or adoption provision. Most of us know that bringing a new child into the family is pricey. Cribs, diapers, and deductibles add up quickly. With this new provision, new parents can now withdraw up to $5,000 from their IRA or 401k without penalty. Now, let’s be clear on one thing: Without penalty is not the same thing as without tax. You still have to pay income tax on the money you withdraw, but you won’t have to pay the 10% early withdrawal penalty you would have before the Act went into effect.
- The “Stretch” RMD. This is a big one, and the one that has probably garnered the most attention, for good reason. Before the provision, if you inherited an IRA from someone who passed, you could “stretch” the distribution payments over your life expectancy. This was a nice benefit to many people, as they could keep the money growing in the account and only take out small amounts, (especially if they were younger,) until they needed more money later in life. All that changed with the SECURE Act.
Now, Congress has imposed a 10-year distribution limit for most non-spouse beneficiaries. What’s that mean? In layman’s terms, it means that all of the money in an inherited IRA has to come out within 10 years of the date of inheritance. And yes, the taxes must be paid. There’s no sugar-coating this one. It has the potential to be a big deal, depending on your situation. For all of the provisions, and especially this one, I highly recommend working with a financial advisor.
Summary
If you are turning 70 ½ this year, are planning to have a child or adopt in 2020 or beyond, or will inherit an IRA, the SECURE Act is definitely going to affect you. I highly recommend talking to your financial advisor about your situation. And of course, BMG Advisors is here to answer your questions.
- Adam Hawley is an LPL Financial Advisor and Partner at BMG Advisors. “Plan Your Story”