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ALL ABOUT THE SECURE ACT What Does It Mean for Your Retirement?
The SECURE Act was signed into law on Dec. 20, 2019, and went into effect Jan. 1, 2020. Since then, we’ve had a lot of questions about how it affects retirees or those planning to retire in the near future. The SECURE Act brings significant changes that will affect a large pool of people because it changes the options for how and when retirees and their beneficiaries are able to access their retirement money. So it’s important to understand the basics of this act. Previously, you had to begin taking your required minimum distributions starting in the year you turned 70 1/2. Calculating this strange age bracket has long been a point of confusion, but now, Congress has made things a little easier by changing the age to begin taking required minimum distributions to 72. If you’ve already begun taking distributions and you’re under the age of 72, this change, unfortunately, doesn’t apply to you because once you’ve started, you can’t stop. But if you were born on or after July 1, 1949, you may now wait until you’re 72 to start taking those required minimum distributions.
Additionally, people were previously required to take their minimum distributions at 3.65% of all their tax- deferred accounts. Now, you have to take them at 3.91%. So there is an upside in this scenario. But with every upside, there’s inevitably a downside. The second major change to retirement planning under the SECURE Act is how it affects beneficiaries. Previously, if your beneficiaries inherited your Traditional or Roth IRA, they had the choice to either accept the full sum of their inheritance at once and pay income tax on it in full or opt to stretch the account for as long as they saw fit and benefit from the tax advantage of an IRA. This was referred to as a stretch IRA and has served as a viable lifetime income source for many. But the SECURE Act has eliminated this option. Under the new legislation, a spouse, if they are your beneficiary, will still be able to accumulate your accounts into theirs, tax-free, and will then begin taking mandatory distributions when they turn 72. But if your beneficiaries are your children or grandchildren, they will be required to
accept the entire inheritance and pay the income taxes on it within 10 years of the original account holder’s death. This means they’ll have no choice but to distribute the money from the inherited account in much larger sums over a shorter period of time, which leads to increased tax dollars that go to the government. The intentions behind this new act seem pretty clear from where we stand. The SECURE Act gives many people a lot to think about when it comes to their retirement planning and what they intend to leave for their beneficiaries. If you’re planning on leaving your beneficiaries an IRA or a 401(k), it’s crucial to revisit and rethink your estate plan, especially if it’s been a while since you created it. In hand with current tax cuts, this may be a great time to start thinking about converting money into a Roth IRA and to officially do so before Dec. 31, 2025, when they would be set to expire. These are significant changes, but try not to let it get the best of you. Your estate planning attorney can help you reassess your plans, and Retirement Planning Strategies can help you figure out the dollars and cents of it all.
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