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The SECURE Act and What it Means for Your Retirement

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As part of the December 2019 government spending package, Congress signed into law the SECURE (Setting Every Community Up for Retirement Enhancement) Act, which has some significant changes for income tax and retirement planning. As with any new tax law, the Act provides new obstacles to navigate as well as long-overdue common sense changes that are intended to make retirement more accessible to Americans.

The most notable change under the SECURE Act is the elimination of “stretch IRAs.” Under old law, distributions from an IRA or 401(k) plan inherited by a non-spouse beneficiary were able to be spread over the life expectancy of the beneficiary (typically 20 to 30 years). Most commonly under the old law, adult children (say in their fifties or sixties) would have been able to slowly draw down an inherited IRA account over 20 to 30 years, giving more time for earnings accumulation and tax-deferred growth in the account. Under the SECURE Act, inherited IRAs and 401(k) plan assets of a non-spouse beneficiary now must be distributed within 10-years following the death of the account holder. This rule applies to inherited non-spousal IRAs as well as Roth IRAs after January 1, 2020. If you are a beneficiary of an inherited IRA or 401(k) and the original owner passed away prior to January 1, 2020, the SECURE Act will not change those distributions.

The example below illustrates the difference in RMDs between a Stretch IRA over 30 years vs. 10-years by the SECURE ACT (The example assumes a $1 million inherited IRA account with a 7% market return).

Other notable provisions of the SECURE Act include:

  • Repeals the maximum age (which was 70 ½), for being able to make Traditional IRA contributions
  • Increases the age from 70 ½ to 72 for Required Minimum Distributions (RMDs)
  • Allows penalty free withdrawal of up to $5,000 from a 401(k) or IRA for a “qualified birth or adoption” expenses
  • Up to $10,000 can be withdrawn from 529 plans to pay off certain student loans
  • Brings back the beloved “Kiddie Tax” for tax years beginning after December 31, 2019
  • Small businesses (less than 100 employees) can receive up to $5,000 in tax credit for starting a workplace retirement plan

As with all tax law, the SECURE Act provides new opportunities for taxpayers as well as new obstacles to navigate. Changes under the SECURE Act should be reviewed alongside your financial planning goals and estate planning needs.

For more information, contact your Berntson Porter representative at 425-454-7990. We’re here to help!