How the SECURE Act Impacts IRAs

Learn more about how the SECURE Act may affect your individual retirement accounts.

At the end of 2019, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The SECURE Act’s changes ranged from making it easier for small business owners to offer retirement plans to allowing 529 plan funds to go toward paying down student loan debt.

Still, perhaps the biggest news is that the SECURE Act brought notable reforms to individual retirement arrangements (IRAs)¬. The act adjusted several rules around required distributions, contributions, beneficiaries, and withdrawals for traditional IRAs, which could affect many Americans’ retirement plans.

Here’s a quick SECURE Act summary outlining IRA reforms and how they might impact your retirement plan.

Later Minimum Distributions...

One of the core changes of the SECURE Act adjusts the age when traditional IRA owners have to start taking required minimum distributions (RMDs). Previously, account owners were required to start taking distributions the year they reached age 70 ½. Now, the age criteria for RMDs has been raised to age 72 (for IRA owners who haven’t turned 70 ½ before 2020).

This allows IRA owners to grow their nest egg for another year and a half before they are required to start taking out their savings, which will support a later, and potentially longer, retirement.

You may want to speak to your Wealth Advisor about your retirement withdrawal strategy (in conjunction with your overall plan), and how you might adjust in response to the higher RMD age.

...And More Contributions

The SECURE Act also removed the age limit for IRA contributions.

Before the act, traditional IRA owners were not allowed to make contributions during or after the year they turned 70 ½. Under the new laws, traditional IRA owners can continue to make annual contributions in years they earn income, regardless of age.

As people live — and work — longer, the ability to continue contributing pre-tax income and growing it tax-deferred in an IRA may help Americans increase their retirement savings and secure a more financially stable retirement.

For your own planning, consider how long you expect to continue working and when you might need to start accessing your savings. The new laws around contributions and RMD age could greatly affect how you plan out your retirement income.

Withdrawal Exceptions

Another reform is the ability to take a distribution of up to $5,000 from a traditional IRA or 401(k) to pay for qualifying birth or adoption costs.

While the funds are taxable when an account owner chooses this distribution option, the withdrawal won’t incur the 10% early distribution penalty that many withdrawals taken before age 59 ½ would incur. This new option makes retirement savings accounts more flexible and can help account owners tackle the significant financial burden of a new birth or adoption.

It’s important to remember, however, that taking an early withdrawal from a retirement account — even without incurring a penalty — will reduce potential earnings in the long-run. Carefully consider how well you are progressing towards your savings goals before you consider an early withdrawal.

No More “Stretching”

Finally, while the SECURE Act reduces or removes many restrictions surrounding IRAs, it also introduces a new regulation.

Previously, people who inherited an IRA after the death of the original owner were able to “stretch” distributions from the IRA over their own life expectancy. Now, IRA inheritors are required to take enough disbursements to empty the IRA within 10 years.

However, this 10-year restriction does not apply to these designated beneficiaries:

  • The surviving spouse
  • Disabled or chronically ill beneficiaries
  • Minor children (until they reach the age of majority)
  • Beneficiaries less than 10 years younger than the original IRA owner

If you inherit an IRA, or if you plan to leave an IRA to someone who would not qualify as a designated beneficiary, be sure to consider this change to distribution requirements.

Ultimately, the SECURE Act aims to help Americans achieve a stable retirement in a world where people are working longer and living longer in retirement. Removing limitations on RMDs and contribution age limits can help people’s retirement savings grow and last a bit longer, while additional penalty-free withdrawals can help people manage major financial burdens without fear of incurring penalties.

To learn more about how these reforms may affect your retirement planning, talk to a Wealth Advisor today.