The SECURE Act of 2019 has officially passed. This is a new initiative that will drastically change retirement as we know it, containing 29 separate provisions. Out of these, there are a few that are exceptionally notable that you should bear in mind when looking to finance your retirement plan.
The age of initiation for RMDs has been raised from 70 ½ to 72. What this means for you is that your IRA has more time to grow and build compound interest, as there is less time to decrease the balance of the account. When taking into consideration how much longer employees are working and the rise in the average retirement age, this initiative will immediately yield positive results for retirees.
You no longer have to stop contributing to your IRA once you’re 70 ½, as SECURE lets you continue to make contributions well after the original cutoff age. Like the RMD changes, this provision was implemented with the idea that Americans are working later into their lives and might need more time to contribute to their savings. Initially, if you had a contributory IRA that is worth $400,000, your RMDs would begin at age 70 ½, netting you only $14,600. Under the old RMD rules, you wouldn’t save more than $552,000. Now, you could work until age 72, max out your contributions, and stop saving at age 72. The maximum value of your IRA could be up to $40,000 higher.
If you are a part-time employee, SECURE will benefit you as well, because you are now eligible for 401(k) and other similar retirement plans. More and more members of the workforce are turning to part-time work and contract work as their primary source of income, and these new provisions help that growing population adequately save for retirement.
It’s not just part-time workers who are feeling the benefits. Students who have a §529 plan can use up to $10,000 from the account to help with student loans, helping them pay off debt quicker to avoid incurring interest and stay afloat financially while repaying their education. New parents will also be eligible to withdraw $5,000 penalty-free to offset the cost of qualified delivery or adoption expenses.
Affecting a Wide Range of Individuals and Plans
SECURE eliminates Stretch IRAs, mandating that inherited IRAs with any beneficiary that is not your spouse must be withdrawn within ten years. Initially, you could leave your spouse your IRA after you pass on and have them roll it over into a larger account, which would then go to your children or grandchildren after your spouse dies. This is how the “stretch IRA” gets its name — it stretches on throughout your beneficiaries. It sounds like a great initiative, but the downside was it did nothing to improve the tax brackets of the recipients. Now, these inherited IRAs have to be disbursed within a decade of your death or your spouse’s death, whichever comes later. This will increase the amount of taxes payable, as more substantial distributions will be required, possibly raising the income taxable payable and reducing the ability to gain tax-deferred growth. The following exceptions include:
- Spouses
- Beneficiaries who are minors
- Beneficiaries who have special needs
- Beneficiaries who are within ten years of age with the IRA’s original owner
Long story short, the SECURE Act is going to affect a wide range of people and plans. The following accounts will be affected under these new provisions:
- 401(k)
- 403(b)
- 457(b)
- 401(a)
- ESOPs
- Cash Balance plans
- Defined benefit plans
- IRAs
How much it affects you will depend on how much is in your account. Those with under $100,000 will barely feel any effects, if they feel any at all, while those with over $400,000 may change the way you plan for retirement entirely. Anywhere in between these ranges will depend on your age, income, and beneficiaries.
Contact Slutsky Elder Law Today!
A review of your financial and estate plans, as well as a conversation with your financial professional, should be considered. To discuss how any of your accounts may be legally affected by SECURE, as well as your Medicaid Applications, count on Slutsky Elder Law to assist you through these changes. Those seeking out Medicaid Asset Protection Programs in Chester County, PA or looking for an updated retirement plan based on SECURE should contact our offices today.