In the flurry of holiday merry-making, you may well have missed some important news for your retirement savings: Late last month, Congress passed the SECURE Act, which includes some significant new rules affecting how we all save and plan for retirement. Here are five of the biggest changes that may impact your bottom line—and your tax bill.
- Invest Longer, Take Distributions Later. Under the SECURE Act, the required age for taking minimum withdrawals from your qualified retirement accounts has been pushed back from 70½ to 72, effective January 1, 2020. This allows additional time to grow your tax-deferred retirement money (and using a whole-number age makes it easier to figure out when you need to start). The change, however, is no help for those under age 72 already taking required minimum distributions (RMDs): The clock has not reset and you must stick with the old schedule. Additionally, those who reached age 70½ in 2019 must take their first RMD by April 1, 2020.
- More Time to Contribute to Traditional IRAs. Under previous law, you were unable to contribute to a tax-deductible IRA after age 70½. Now, if you continue to have “earned income” (a.k.a. a paycheck) in your 70s, you and your spouse can keep making those contributions. (It’s not covered by the SECURE Act, but it’s worth knowing that employee-sponsored 401(k) plans also have no upper age limit on contributions while you are still working.)
- Annuities in 401(k)s. Don’t be surprised to see more annuities popping up as investment options in your 401(k) plan. Currently, fewer than 10% of 401(k) plans offer annuities; the SECURE Act includes provisions incentivizing their addition. Note that while annuities can be a useful tool for some retirees, we don’t consider them well-suited to all by any means. If you are considering making any changes to your 401(k) investment strategy and would like our advice, please give us a call.
- Inherited IRAs Must Be Wound Down. The government wants inheritors of IRAs to pay their taxes sooner rather than later. Previously, people who inherited traditional IRAs could withdraw money throughout their lifetime (this is still the case for IRAs inherited by year-end 2019). Under the new SECURE Act, inheritors will need to drain an inherited IRA within 10 years. Note: Surviving spouses, minor children and recipients within 10 years of age of the deceased are exempt, for the most part. However, once minor children reach age 21, the 10-year clock starts ticking.
- Charitable Distributions Remain. Many retirees opt to make charitable distributions from their IRAs to help reduce taxes. Even though the SECURE Act bumps the RMD age threshold to 72, qualified charitable distributions (QCDs) are unaffected. After hitting 70½, you can still make charitable distributions from your IRA of up to $100,000 per year. However, if you’re still working and adding money to your IRA accounts after 70½, those additions will reduce your annual QCD limit dollar for dollar.
The changes we’ve mentioned will affect many retirees, but there is much more to this sweeping new law, including many wrinkles that may bear on your specific situation. We recommend consulting with us to see what the SECURE Act means for you. Please don’t hesitate to contact your portfolio team here at Adviser Investments. We’re happy to help!