You’ve probably heard about the SECURE Act, but you may not be sure if and how it affects you personally. The reality is, the Setting Every Community up for Retirement Enhancement Act of 2019, (SECURE Act), affects every single American who’s saving for retirement—including you! In particular, the bill makes important changes when it comes to IRAs, generally helping people save more, for longer.
We’re going to share what you need to know about the SECURE Act and your IRAs, beginning with some age-specific information. Find your age bracket below to learn about how the SECURE Act affects you.
Age-related SECURE Act changes to IRAs
If you’re under age 59½ …
You may be aware that if you’re under age 59½ and make a withdrawal from an IRA, you must pay a 10% penalty for the amount withdrawn.
Under old law, there were a few exceptions to this rule, such as for medical or education expenses. The SECURE Act adds a new exception to early withdrawal rules for traditional and Roth IRAs. New parents may now withdraw up to $5,000 for the birth or adoption of a child, without paying the early withdrawal penalty.
Another change that affects people who are under age 59½ relates to students. Under the SECURE Act, the amount paid to graduate and post-doctoral students is now treated as compensation for purposes of making IRA contributions. Under old law, students receiving stipends weren’t allowed to contribute, but now they can.
If you’re approaching age 70½…
If you’re nearing age 70½, you probably know about required minimum distributions (RMDs). These are amounts you must withdraw annually from your traditional IRAs.
Under old law, RMDs began at age 70½. The SECURE Act raises the age to 721. This means you can take advantage of an additional 18 months of IRA tax advantages!
If you’re over age 70½…
More Americans than ever are working in retirement, and the next SECURE Act change helps this group.
Under old law, contributions to a traditional IRA were prohibited once a person reached the year they turned 70½.
Now under the SECURE Act, anyone, even those older than 70½, can contribute to their IRA, as long as they continue to work. If you’re working into your seventies, talk to your financial advisor to decide if continuing to contribute to your IRA makes good financial sense.
The SECURE Act and “stretch” provisions
The next IRA-related change we’re going to talk about has to do with the elimination of “stretch” provisions. If you’re inheriting or planning on bequeathing an IRA, this change affects you.
Under old law, beneficiaries of an IRA could take distributions based on their life expectancy, allowing them to “stretch out” the value of the IRA for a longer period of time.
The SECURE Act updates this law, requiring non-spouse beneficiaries to withdraw all assets of an inherited account within 10 years, at which point the beneficiary must pay taxes on that money. This means all the money in the IRA must be withdrawn by the end of the 10th year following the year of inheritance.
The 10-year rule does not apply to spouses, disabled and chronically ill beneficiaries, and minors. For minors, the exception lasts until the child reaches the age of majority, which is 18 to 21 depending on the state. Once the minor reaches that age, the 10-year rule kicks in.
If you plan to leave an IRA, or are expecting to inherit one, have a conversation with your financial advisor about your options to help you and your heirs maximize your retirement savings while minimizing your tax burden2.
Next steps to take…
The SECURE Act will help approximately one quarter of working Americans to save money, take responsibility for their own retirement future, protect those assets and minimize taxation.
Updates to the law may require you to revisit your IRA contribution and withdrawal strategies or change your estate planning strategy.
If you have questions or concerns, your Bankers Life representative is here to help!
1Effective January 1, 2020, the RMD age increased from 70½ to 72. If you turned age 70½ in 2019 (born prior to July 1, 1949), you will still need to take your RMD for 2019 no later than April 1, 2020.
2Bankers Life and their representatives do not provide legal or tax advice. Each individual should seek specific advice from their own legal or tax advisors.
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