SECURE ACT – Part 1

Just before the holidays last month, Congress passed and President Trump signed into law significant changes to retirement accounts that affects owners and beneficiaries of tax deferred retirement accounts including IRAs and 401ks.  Known as the SECURE Act (Setting Every Community Up for Retirement Enhancement Act), it became effective 1/1/2020.  While some of the changes are favorable, others are definitely not.

First let’s review the favorable ones.  Before the SECURE Act, once an account owner reached 70 and ½ years of age, no more contributions could be made to traditional IRAs.  The SECURE Act repealed this age restriction so now you can make contributions no matter your age.  This was always the case, by the way, for Roth IRAs and remains unchanged.

The new law also raises the required minimum distribution age, the point when you must begin withdrawals from your retirement account.  It was 70 and ½ and now it is 72 but only for people who reach 70 and ½ in 2020 or later.  For anyone who already turned 70 and ½ the RMD age remains 70 and ½.  There is an exception to the RMD requirement that remains the same.  If you continue to be employed beyond your RMD date, you can postpone that date until you do retire – as long as you don’t own more than 5% of the company that employs you. Now for the changes that are not favorable.  These relate to what happens to the retirement account after the account owner dies and leaves the remaining account to his/her beneficiary.  Under the old law, beneficiaries could stretch out the required distributions over their own life expectancies, hence the term “stretch IRAs”.  The new law dramatically curtails this ability.  More on that and how these changes could affect long term care planning in next week’s post