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The SECURE (Setting Every Community Up For Retirement) Act

silouhette of a couple sitting in lawn chairs under a tree in front of a beautiful sunset

Do you ever notice how politicians tend to get key legislative pieces passed the last week or two of the year? Doing their best impersonation of that co-worker or boss we’ve had who tends to be the most productive the last hour of the day or last couple hours of the week? I guess it beats the heck out of the peer who’s already spending the last hours of the day or week at happy hour. I’m not judging; I’m just bringing it up as a way to let you know another law passed under similar circumstances at the end of 2019.

The SECURE Act overall goal is to increase access to tax-advantaged accounts and to prevent older Americans from outliving their assets. Here are two key pieces from the act that I think will have the biggest impact for our clients.

  • The “stretch IRA” wealth transfer method has been eliminated (for most non-spouse beneficiaries) in favor of a 10-year distribution requirement.
  • Required Minimum Distribution age has been pushed back from 70½ to age 72.

The Stretch IRA

What happended to the Stretch IRA? The SECURE Act will no longer allow non-spouse beneficiaries who inherit retirement accounts to “stretch” the required minimum distributions over their lifetime. Effective in 2020, any newly inherited IRA account will be required to be liquidated completely within ten years of the inheritance date. There are some exceptions such as when the beneficiary is a surviving spouse, disabled or chronically ill, less than ten years younger than the deceased IRA owner (possibly a sibling), or a minor aged child (however once they reach adult age, they’ll have to liquidate within ten years).

Anyone who has a large IRA or 401k who is interested in leaving an inheritance for their children should discuss and analyze the impact of this new rule. Put on your Andy Dufresne cap and make a plan. I’m pretty certain it won’t take you 20 years to figure this out, and it will be a lot easier than Andy’s escape from Shawshank. We recommend an in-depth conversation related to tax diversification, where we discuss if including Roth IRAs as part of your investment plan makes sense. Other strategies to discuss might include making Roth IRA conversions, beneficiary changes and analyzing income flows and expected tax brackets during retirement. These conversations are probably most critical for a single or surviving spouse with a large traditional IRA balance.

Have you had a Comprehensive Financial Review recently? Are you on track to reach your retirement goals? Do you know? Do you need to make changes to your plan? It is a lot easier to stay informed and manage through the ups and downs of the markets if you have solid, thoughtful plans with annual meetings (aka the annual financial physical) to update your plan to reflect any potential changes in goals, savings and/or income.

Changes to required Minimum Distribution (RMD) age:

What happened to the RMD Age?The SECURE Act contains a change to when you have to take an RMD. This age change is moving from 70½ to 72. I believe change is a good thing and essentially gives you more chances to make Roth conversions (if they make sense for your situation) and provides more time for your money to grow tax-free before starting the required withdrawals. So to contradict Tom Petty, the waiting is not the hardest part. I think waiting till 72 to withdraw from the IRA makes a ton of sense for those who don’t need the income and want to pass their IRA and 401k assets onto their beneficiaries.

Other SECURE Act Changes

Several pieces of the act encourage small businesses to establish or enhance the retirement plan options and features available to their employees. This includes the ability to contribute to Traditional IRAs after age 70 ½ (for those with earned income to contribute), the ability to add annuities to Qualified Retirement plans, and changes for small businesses that should make it easier for them to offer a retirement plan to their employees.

Check out his Wells Fargo Advisors report to learn more about the items mentioned here and others not shown above.

Wells fargo Advisors Financial Network and Trinity Capital Management are not legal or tax advisors.

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