Sweeping rule changes in the retirement landscape were put into place when the Setting Every Community Up for Retirement Enhancement Act (SECURE) Act became effective on January 1st, 2020. This bill altered the rules surrounding how Americans can save for retirement and access the money they’ve saved. Wondering how the SECURE Act will impact you and your loved ones in the coming years? Read on to discover the implications of this act when it comes to financial planning.
Understanding the SECURE Act
It’s no secret that many Americans struggle to save for retirement. In fact, a Northwestern Mutual study from 2018 revealed that 20 percent of adults in the U.S. had no retirement savings. A bipartisan bill, the SECURE Act was created to make it easier for Americans to save for retirement.
SECURE Act Implications
The SECURE Act has far-reaching implications that will affect financial planning for millions of Americans. Although the SECURE Act was designed to help Americans achieve a secure retirement, some of the new provisions could actually have the opposite effect. Here are some of the principal ways in which the SECURE Act is affecting retirees and their families.
The SECURE Act has changed the rules for retirement accounts subject to required minimum distributions. In the past, individuals were required to start taking withdrawals from their retirement accounts by the age of 70 ½. However, since the passing of the SECURE Act, individuals can postpone required minimum distributions until age 72. This change eliminates the confusion of calculating the half year and is helpful for those Americans who are choosing to retire later in life and allow their retirement savings to continue to grow tax deferred until age 72.
Under the old law, individuals were prohibited from making Traditional IRA contributions after age 70 ½. However, the SECURE Act permits contributions at any age, provided that the individual is still working. This particular change provides some planning strategies for those still working beyond age 70 ½.
Help for New Parents
The SECURE Act has expanded options for penalty-free early distributions. If you have a birth or adoption of a child, you are allowed to withdraw up to $5,000 per child, per parent from an IRA or 401(k) without being subject to IRS penalties. Avoiding the tax penalty on the withdrawal may seem like a benefit at the time of the distribution. However, the distribution is still taxable, and the withdrawal of those funds can have a significant impact on your financial plan when accounting for the loss of compounded growth of those funds over time.
Elimination of the Stretch IRA provision
The elimination of the Stretch IRA provision as a result of The SECURE Act will have an impact on retirement and legacy planning. Prior to The SECURE Act, non-spousal beneficiaries were able to stretch the required distributions of an inherited IRA over their life expectancy. The SECURE Act now requires beneficiaries to empty those accounts by the end of the 10th year following the year of death. This change could have significant tax implications for the beneficiaries with large Inherited IRA account balances. The tax impact could be magnified even more for those in their peak earnings years already paying hefty tax bills. Although some exceptions exist to the 10-year rule, most individuals should plan on not being the exception to the rule and seek out financial planning strategies to minimize the impact.
Trust Concentrum Wealth Management with Your Financial Planning
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