New Law Brings Changes to Retirement Planning

Since it happened right in the midst of the 2019 holiday season, you may not be aware that new legislation bringing sweeping changes to retirement plans was passed on December 20, 2019. The SECURE Act (for Setting Every Community Up for Retirement) became effective on January 1, 2020. It has many provisions; some are aimed at individual savers (this means YOU), and some are focused on employers.

The SECURE Act eliminates "stretch IRAs." A stretch IRA happens when you inherit an IRA and you extend its distributions over your lifetime. If you are young, this was a real tax-saver because you could extend the payout period of the inherited IRA over several decades, thus spreading out the payment of income taxes over a longer period of time. It also meant that the risk to increasing your income in a tax year, and potentially moving into a higher tax bracket, could be reduced.

Effective for deaths occurring after December 31, 2019, funds from inherited IRAs must now be fully withdrawn by beneficiaries within ten years of the account owner's death.

The new law also changes the age limit on contributions to a traditional IRA. Previously you had to stop contributing to a traditional IRA at age 70 1/2. Now there's no age limit, so you can keep contributing. Roth IRAs have never had an age limit for contributions, and that hasn't changed.

Before the new law, you generally had to start taking required minimum distributions (RMDs) from 401(k)s and IRAs when you turn 70 1/2. Now you can wait until you're 72 to begin taking RMDs. The way this works is that you must begin taking RMDs no later than April 1 of the calendar year following the year in which you turn 72.

Whether you are saving for retirement, or may inherit an IRA, you will be affected by these changes and other changes in the STRETCH act. For example, if you inherit an IRA, you must take RMDs spread out over ten years. If the IRA is large, this can be a significant increase to your income and can bump you into a higher tax bracket. Because you now no longer need to take RMDs from your own IRA starting at age 70 1/2, you may want to delay your own RMDs until a later year. Of course, these decisions are very personal and depend on your individual situation. Things such as your cash flow needs, the size of the inherited IRA, the size of your personal IRA, and any other sources of income will all factor into this decision.

There are other strategies you may want to consider to make the best of these changes and other changes in the STRETCH act. Plan ahead so your retirement savings and income serve you well in your retirement years.