You must have heard about the new Retirement Enhancement Act of 2019, better known as the SECURE Act, which was signed into law on December 20th 2019. This is in interest to individuals who are planning to invest their money into retirement plans this year.
Let us take a look at the five main tenets of the Secure Act to make a healthy investment call.
Bye-Bye Stretch IRAs
The first and foremost change made by the Secure Act is reducing the stretch IRAs for non-spouse beneficiaries. The Act enforces from 2020, the payout for non-spouse beneficiaries shall be made within ten years as against during the lifetime as set by the previous laws. The new law only makes exceptions in a few circumstances such as when the beneficiary is,
- Chronically ill
- Less than ten years younger than the account owner
- A minor child of the account owner until reaches majority
Reasons to consider Roth IRA
The Secure Act makes the popularity of Roth IRA touch the skies. The primary reason for such popularity can be credited to the fact that qualified distributions made from Roth IRA are tax-free. Since the tax rates are fixated as same till 2025, you can take benefit by investing into Roth IRA and take advantage of paying lower rates on taxes and set-up beneficiaries to receive tax-free income in the future.
Age for minimum distributions pushed to 72 years
The Secure Act takes a gig at several long-standing retirement rules. This comes with the increase in revenue generation through the demise of stretch IRA. The Act has moved the beginning date for required minimum distribution from 70.5 years to 72 years. This applies to citizens who turn 70.5 years after 2019. The increase of 18 months might not seem significant, but sources have it that this news has come as a respite to many retirees. The reason is that taxpayers opting to work later in life generally do not prefer to receive the income they don’t immediately need.
No age caps for IRA contributions
The Secure Act brings more flexibility to the system by removing the maximum age cap for making traditional IRA contributions. The move brings traditional IRAs in line with 401(k), Roth IRA, and other retirement plans.
What this implies is that if you as a senior citizen are still earning, then you can continue to make IRA contributions no matter what your age.
Review your estate plan
Another shift accompanied with the Secure Act calls for a relook at your beneficiary designations and estate planning documents. Previously, many financial planners and estate planners used to encourage taxpayers to take advantage of the benefit of naming family members outright or make use of language in a trust to avail stretch provisions. The Secure Act flips this funda, and such a language in your documents could trigger a more extensive distribution in the 10th year after your death. Depending on the size of this income, it could result in huge tax liability for your heirs.
The Bottom Line
The Secure Act has made significant headlines and changes to the definition of retirement plans. Those of you planning to invest in retirement plans and save some tax shall give a thorough look at the newly implemented act to understand and make sound investment decisions. To understand the various nuances of the Secure Act before making any investment decisions, feel free to contact your MyTaxFiler expert today.