Review Your Retirement Plan to Consider SECURE Act Changes

By now you’ve probably heard of the SECURE Act, and that it’s the most significant piece of retirement legislation (opens in new tab) to become law in more than a decade. You also may have read that its changes could affect nearly every saver in the U.S. — from those just starting out in their careers to those already retired.

If that’s as far as you’ve gotten in your research, though … well, who could blame you?

The name alone — the Setting Every Community Up for Retirement Enhancement Act of 2019 — is an unwieldy mouthful. And its provisions are dense and complex, I’m sure even some financial professionals haven’t yet waded through all the wording.

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Still, because the new law is so big, it’s important to understand the impact it could have on you and your family — particularly if you’re in or near retirement. You might want — or need — to change up some of your retirement strategies this year.

Here are three major pieces of the SECURE Act to look at now:

It pushes back the age for required minimum distributions (RMDs)

Under previous law, most retirees were required to begin taking RMDs from their retirement accounts (and pay taxes on those withdrawals) after they turned 70½. The SECURE Act changes that age to 72, giving savers who hadn’t yet turned 70½ by the end of 2019 — meaning those born on July 1, 1949, or later — an opportunity to grow their money for a bit longer.

What that might mean for you: If you’ve been stashing away money for years in a tax-deferred savings account (a traditional IRA, 401(k), 403(b), etc.), you may be facing a tax burden in retirement. Current income tax rates are relatively, low thanks to recent reforms, but they are set to go back up at the end of 2025. If you think RMDs could push you into a higher tax bracket in retirement, a Roth conversion could help tackle the problem. The SECURE Act gives you an extra year and a half to consider it before RMDs are required.

It takes the “stretch” out of an inherited IRA

Until now, a beneficiary could take RMDs from an inherited IRA based on his or her life expectancy and spread the withdrawals (and any taxes due on those withdrawals) over decades. The SECURE Act takes away this option for many beneficiaries of IRAs as well as 401(k)s and other defined contribution plans. Most beneficiaries will be required to empty the inherited account and pay the taxes within 10 years of their loved one’s death. This change doesn’t affect spouses, beneficiaries who are disabled or have a chronic illness, minor children or those who are within 10 years of the age of the deceased. It also doesn’t apply to beneficiaries who inherited an IRA prior to 2020.

What it might mean to you: If leaving a tax-efficient legacy for your loved ones is a goal, you’ll want to consider reviewing your estate plan. Your adult children could end up having to take the RMDs from an inherited IRA during what could be their highest earning years, which might push them into a higher tax bracket. You may find it makes sense to take the money out of your IRA now, pay the taxes on it yourself and convert the money to a Roth account for your children to inherit. They’ll still have to take RMDs on the Roth, but those withdrawals will be tax-free.

It gives you more time to contribute to your IRA

As long as you still have earned income, you can continue adding to your traditional IRA. The SECURE Act gets rid of the maximum age, which used to be 70½. (Roth IRAs and 401(k) plans have never had age limits for contributions.)

What it might mean to you: Many pre-retirees and retirees say their No. 1 worry is that they will run out of money during a long retirement, or they’ll have to downsize their lifestyle. If you decide to keep working, you can continue to contribute to your traditional IRA for as long as you like (up to $6,000 in 2020, plus a $1,000 catch-up contribution if you’re 50 or older) and potentially add to your long-term security.

Did I mention that the SECURE Act is complex and there are changes yet to come? That means proactive planning is recommended. Make it a priority to review your tax, income and estate planning this year — but I recommend you focus bq2weyond 2020. Your retirement could last 20 to 30 years or longer — and depending on how you set up your estate, your legacy could last for decades beyond that.

Take the time now to have a big-picture conversation with your financial professional — then take the steps that could lead to success down the road.

Kim Franke-Folstad contributed to this article.