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How the SECURE Act Affects Retirement & Estate Planning

The SECURE Act, signed into law in December 2019, can affect both the way people plan for retirement and the future beneficiaries of retirement plans and IRAs.

While these changes can present some challenges, they may also provide more opportunity to save on tax bills for retirement. Let’s take a look:

Tax deductible contributions to IRAs at any age

The days of traditional IRA contributions being limited to would-be retirees before the age of 70½ are no more. Starting in 2020, the new rules allow individuals of any age to make tax deductible contributions to an IRA if they’ve earned income from wages or self-employment.

Required minimum distribution age raised from 70½ to 72

Before 2020, retirement plan participants and IRA owners had to start taking required minimum distributions (RMDs) from their plan or IRA beginning in the year they reach age 70½. With the SECURE Act, the new required beginning age is 72. If an employee works past age 72 (and has more than 5% ownership of the company—directly or indirectly), he or she may be able to defer RMDs. This change allows workers to defer retirement longer if they choose, and will give them at least an additional 18 months to save before RMDs begin.

Partial elimination of stretch IRAs

Prior to the SECURE Act, when an IRA owner passed away, the designated beneficiaries could stretch the tax deferral advantages of the plan over the beneficiaries’ life expectancy. This allowed beneficiaries to stretch out the RMDs well beyond the date of the account owner’s death. The technique was sometimes called a “stretch IRA”. Under the SECURE Act, distributions to most beneficiaries are now required within 10 years of the IRA owner’s death, regardless of life expectancy.

However, some exceptions to the 10-year requirement exist. Surviving spouses, minor children, chronically ill individuals, those with disabilities, and individuals not more than ten years younger than the plan participant or IRA owner are exempt from the new rule and can maintain the stretch IRA. Even this limited stretch out availability can be reduced. For example, when the IRA owner’s child reaches the age of majority, the 10-year clock would begin to run.

For those impacted by this change, there are strategies and design techniques that may accomplish the same goal of a stretch IRA or replace the benefits that have been lost.

Opening doors to new opportunities

As you can see, the SECURE Act will impact the way you plan for retirement, the disposition of your estate, and more. While the rule changes may close a few doors, they can open others to provide new savings and investment opportunities. Working with a financial professional can help you optimize your portfolio and take advantage of the rules that may benefit you the most. 

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