At the end of 2019, while many of us were busy decorating and buying gifts for the holidays, the government was quietly passing a bill that would affect almost all of us—not to mention our children and grandchildren. It’s called the Setting Every Community Up for Retirement Enhancement Act, or the SECURE Act.
The SECURE Act will affect retirees, especially those turning 70 ½ this year. It could also affect our IRA beneficiaries when we pass away.
There are pros and cons to the new legislation. Certain parts of the SECURE Act will likely sit well with you, while other parts may well get under your skin. Let’s dive into the biggest changes you can expect.
1. Goodbye, Stretch—Hello, 10-Year Rule
Has your father said he plans to leave you his IRA one day? Or maybe you want to leave yours to your granddaughter.
Non-spouses who inherited accounts used to be able to “stretch” the distributions so the money would last their entire lifetimes. But now there’s a new rule: beneficiaries can only take money out of the account for up to 10 years.
This can be a major setback. If your son inherits your IRA at age 50, he now has to empty the IRA by age 60 instead of steadily withdrawing money so it lasts until he passes away.
There are exceptions to this rule for beneficiaries who are disabled, chronically ill, or less than 10 years younger than you are, as well as for certain children who are minors. And remember, if you’re a spouse, the 10-year rule doesn’t apply to you! Feel free to reach out if you’re questioning whether this rule applies to your family.
There is some good news to soften the blow, though. You don’t have to make required minimum distributions (RMDs) for those 10 years. Let’s say your brother leaves you his IRA of $500,000 when you’re 60, and you retire at age 66. You may choose to wait until retirement to start withdrawing money, as long as you take it all out during those last four years. This could make retired life much more comfortable!
2. Some Trusts Will Have to Be Reevaluated
Have you set up a trust for a child or grandchild to be the IRA beneficiary?
I won’t bore you with the details of how various types of trusts work. Just know that if you’ve set up a beneficiary with a conduit trust or discretionary trust, the new 10-year rule might put your beneficiary in a bind.
The wording in these trusts could make it so that your beneficiary receives a ton of money from your IRA at once. (And one reason you set up a trust was probably so they couldn’t spend it all in one place!) This might also force them to pay a lot in taxes at one time.
You may want to visit the law firm in charge of the trust and discuss how the SECURE Act could affect your beneficiary, and whether you should change your strategy for leaving money to loved ones.
3. The Required Minimum Distribution (RMD) Age is 72
Let’s review: What’s a required minimum distribution, or RMD? It’s the amount you must take out of an IRA every year once you reach a certain age.
The RMD age used to be 70 ½, but the SECURE Act has changed it to 72. This will definitely affect anyone turning 70 ½ in 2020. If you thought you would have to start withdrawing money this year, you can hold onto that hard-earned savings a little longer!
4. Qualified Charitable Distributions (QCDs) Can Still Be Made at Age 70 ½
The age of RMDs may have changed, but the age at which you can start making qualified charitable distributions, or QCDs, has not.
At age 70 ½, you can make QCDs of up to $100,00 per year. When you make a QCD, you transfer money from your IRA directly to a charity. As a result, you don’t have to pay income tax on that distribution. It can also lower your taxable income so you avoid paying Medicare surcharges and/or net investment income tax.
When you turn 72 and have to receive RMDs, a QCD can count as part of your RMD. This kills multiple birds with one stone.
Learn More About How the SECURE Act Affects You
What do you think… Does it sound like the SECURE Act will affect your future? How about your loved ones’ futures?
Keep in mind, while these are the most common changes from the SECURE Act, they aren’t the only differences. We’d love to talk with you about how to alter your plans now that the SECURE Act is in place. Reach out to discuss how to set yourself and your family up for success.