The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 was signed into law on December 20, 2019, and was designed to help Americans be better prepared for retirement. The SECURE Act has made several noteworthy changes to individual retirement accounts (IRAs) that should be considered and will be highlighted below.
One of the biggest changes is how inherited IRAs are treated by their beneficiaries. Previously, a beneficiary who inherited a sizable IRA could take required minimum distributions (RMDs) based on a table provided by the IRS that would allow for many more years of tax-deferred growth. The SECURE Act has shorted the deferral period to 10 years. This means that all monies must be withdrawn and taxed within 10 years of the owner’s date of death. Roth IRA conversions have now become more appealing because, even though they are subject to the 10-year withdrawal period, the distributions will be free of large tax bills that traditional IRAs have to pay. Note that an exception to the 10-year rule is IRAs inherited by surviving spouses.
Some positive changes of the SECURE Act include an increase from 70 ½ to 72 for RMDs from traditional IRAs. This change is helpful for well-off taxpayers who are able to live off of other non-qualified money and allows for a decrease in Social Security taxation if planned properly. The SECURE Act also repealed the age restriction for contributions to a traditional IRA which were previously 70 ½ as well. Now, workers of any age with earned income can contribute to their traditional IRAs.
One of the lesser talked about changes that should not be overlooked, especially for younger taxpayers, is penalty-free withdrawals for birth or adoption expenses. The limit is $5,000 per spouse to cover expenses. For example, a husband and wife would be allowed a total of $10,000 in distributions penalty free if they were planning to adopt a child. Note that the distribution amount is only available up to $5,000 one time and will be taxed as ordinary income.
When planning for retirement, it is vital to be flexible and have a plan that is reviewed annually. The changes that the SECURE Act introduced should be evaluated and discussed with a tax professional in order to stay on track with retirement goals. After-tax cash flow should be the main focus of retirement planning and generational transfer of wealth.