Investor Column: SECURE Act changes the rules for your retirement account

While the rest of us were busy preparing for the holidays last month, Congress was also busy passing a new law considered by many to be the most significant retirement legislation in almost a decade. Known as the SECURE Act, this law made some major changes in how retirement plans are taxed, which should require most Americans to re-visit their own retirement planning this coming year.

Here are some of its key elements:

Previously, most Americans with retirement accounts were required to start taking taxable distributions (known as Required Minimum Distributions, or RMDs) from them in the year they turned age 70½. But effective Jan. 1, 2020,, Americans who have not yet reached that age can delay the start date for their RMDs until age 72. While this presents an opportunity for retirement accounts to grow a bit longer, the life expectancy tables used to calculate annual RMDs remain unchanged. That means that annual RMDs will be larger than under previous rules, causing taxable income from these distributions to go up, which could affect the cost of Medicare premiums for some Americans.

On the flip side, the SECURE Act repeals the age restriction on contributions to traditional IRAs. As a result, Americans who are under age 70½ in 2019 and continue working into their 70’s and beyond can continue to contribute to a deductible IRA like Roth IRA contributions, which never had an age restriction as long as the taxpayer had earned income.

More significantly, the rules regarding inherited retirement accounts were changed by the SECURE Act. Previously, a non-spouse beneficiary of an IRA had the opportunity to “stretch” RMDs from the account out over their own lifetimes. Now, with a few exemptions, inherited IRAs must be distributed out to non-spouse beneficiaries in full within 10 years of the account owner’s death. This could significantly impact the beneficiary’s taxable income during those first 10 years, potentially leaving less available for their own retirement planning in their lifetimes. (Exempted from the new 10-year distribution provisions are surviving spouses, minor children up until the age of majority, individuals within 10 years of age of the deceased, the chronically ill and the disabled).

Because of this shorter distribution provision with inherited IRAs, owners of traditional IRAs will want to take a closer look at converting traditional IRAs into Roth IRAs during their lifetimes. Unlike a traditional IRA, Roth IRA withdrawals are tax-free as long as certain requirements are met and they have no RMDs during the owner’s lifetime. Roth conversions are generally undertaken to convert taxable IRA accounts into Roth IRAs when income taxes due at the time of conversion are expected to be less now than in the future. Beneficiaries of inherited Roth IRAs must take RMDs, but they are tax-free.

Other provisions of the SECURE Act make it easier and less expensive for small business owners to set up retirement plans for employees, and will also allow more part-time employees (working at least 500 hours a year) to save through employer-sponsored retirement plans, starting in 2021, so there is something in this new law for almost everyone.

Without question, the provisions of the SECURE Act are substantial, and merit a conversation – sooner than later – with your financial professional to help you understand how this new law will affect your own financial – and legacy plans.

Karin Grablin is with SRQ Wealth, 2033 Main Street, Suite 103, Sarasota, FL 34237, 941-556-9004., www.srqwealth.com.

Securities offered through Cetera Advisor Networks LLC, a Broker Dealer, Member FINRA/SIPC. Investment advisory services offered through CWM, LLC, an SEC Registered Investment Advisor. Cetera is under separate ownership from any other named entity. This article is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.

This story was originally published January 13, 2020 at 11:22 AM with the headline "Investor Column: SECURE Act changes the rules for your retirement account."