Breaking News: The‘Stretch’ IRA Is Dead! Federal Government Passes Sweeping Changes to Retirement Account RulesWith the SECURE Act
On Jan. 1 of this year, the SECURE Act, which provides new benefits for people who use retirement accounts to save for when they quit working, became effective. However, the government also added provisions that will limit the options for anyone who inherits a retirement account after the account holder passes away. Here are four major highlights of the new legislation. 1. Delays inWithdrawal Requirements Previously, once an account holder reached age 70 1/2, they were forced to begin withdrawing money from that account each year (known as required minimum distributions, or RMDs). The SECURE Act has delayed this requirement, and an account holder is now able to wait until age 72 before they are forced to begin taking withdrawals from their retirement account (without penalty). The rule that allows (but does not force) someone to begin taking withdrawals at age 59 1/2 from their account without penalty remains unchanged. 2. Age Limit for Contributions to Traditional IRA Before the new legislation, once they reached age 70 1/2, an owner of a retirement account was no longer allowed to contribute to a traditional IRA, even if they were still working and earning income. Under the new law, an account holder is allowed to continue contributing to a traditional IRA at any age as long as they are still working and earning income. 3. Withdrawals for Birth and Adoption Expenses A new exception has been added to the list of “allowable” reasons someone can withdraw from a retirement account before age 59 1/2 without paying a penalty. The SECURE Act includes a new exception that allows an account holder to withdraw up to $5,000 for qualified expenses associated with the birth or adoption of a child.
4. Death of the ‘Stretch’ IRA Under the old rules, once an account holder passed away, a beneficiary who inherited the account could slowly withdraw only the minimum amount required each year (based on the beneficiary’s life expectancy). By making these withdrawals over time, one could defer tax, allowing what is left in the account to continue to grow for decades. This was known as a “stretch” IRA, since the beneficiary could stretch the length of time the IRA account was in place. The most significant change in the SECURE Act was to kill this tax benefit. Now (with a few exceptions), once a beneficiary inherits a retirement account, they are required to withdraw all funds from the account and pay tax on the amount within 10 years of inheriting the account. This is a complete change from the rules that were set up before. Luckily, there are a few exceptions to this rule. If someone inherits a retirement account from their spouse, they do not have to empty it within 10 years (and can follow the old rules). Also, the new 10-year rule does not apply to those who inherit an account from someone who was within 10 years of age from their own. There are also exceptions for minors and persons with disabilities as well.
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