Sometimes, pieces of legislation pass that many recognize by name but know nothing about. They then go about their day assuming it doesn’t affect them. The SECURE Act isn’t one you want to turn a blind eye to, as it likely could affect you.

Setting Every Community Up for Retirement Enhancement is the lengthy name for SECURE Act. The idea is that the items put into place should positively affect savers across the board.

If you have an individual retirement account that goes through a trust upon your death, will inherit an IRA, own an IRA or a 401(k), then you or your beneficiaries likely will be affected by the passage of this legislation.

Age minimums

The required minimum distribution age in a portion of funds must be withdrawn from certain retirement accounts is moved up to 72 from 70 1/2 years old. If you turned 70 1/2 in the year 2019, you’re still subject to the old RMD rules. If you turn 70 1/2 any time after 2020, the new rules apply to you, and you won’t be required to start pulling off those funds until the year of your 72nd birthday. You’ll technically have until April 1 of the year following the year in which you turn 72. 

Many are working into their 70s now for multiple reasons, with longer life expectancy and lack of savings being the biggest. To require them to pull off their IRAs and incur a tax hit is counterproductive to the reason why they continue to work. 

The RMD rule and age 70.5 required start age hadn’t been reviewed since 1960, so the change was due. This should allow workers some more time to defer being forced to take distributions off their traditional IRAs, allowing them the prospect of continuing to grow and not being forced to pay tax on those distributions during their working years.

Stretch IRA

If you had inherited an IRA from mom or dad and they hadn’t been taking RMDs off the account, then there’s the chance that you were able to take the RMDs over your lifetime. Stretching out the distributions also helped stretch the tax due and overall lowering the taxable amount paid.

There’s a new blended rule on this that if the original account owner died prior to Dec. 31, 2019, then the stretch can be allowed, but that is not the case for anyone who passes in 2020 and after. 

The new rule states that all distributions must be completed within 10 years for those inherited from non-spouses. Spouses, along with a few select others, get an exception to the rule.

This isn’t the greatest situation for the non-spouse inheritor because it means, whether you need the money or not, you will be forced to withdraw all money out of the IRA within 10 years and be taxed on it. 

The only good part is that there are no requirements as to how the money is pulled out, only that all the money is pulled out. So, you can defer pulling it out and let the money continue to be invested and grow but then you’ll likely be subject to a large tax bill in the 10th year when you pull it all out. Tax planning will become more important with the passage of this bill.

IRA age limits

The SECURE act allows you to contribute to IRAs after RMD age, starting this year. This is a handy little tool that helps in both saving for retirement and tax planning. Just like kicking out the RMD age because many are still working, allowing workers to save into their IRAs even past their RMD age is beneficial. 

You still will be required to take RMDs, subject to the new rules, but you can put money into your IRA potentially lowering your taxable income and helping offset some of that RMD for those that still have earned income. 

Last one here, a bit different than most, is the allowance of annuities in 401(k)s. 

This is probably the most convoluted piece here. 

Annuities can be incredibly complex insurance products and legalistic in nature with many varying fees, terms, and required periods of time you hold them to be penalty free.

For those who would consider an annuity in their 401(k), I would suggest to work closely with your adviser to know what you’re buying, how it will work into your retirement plan and potentially your estate plan with the disallowance of the Stretch IRA. You could very easily get sideways and not know it with this one.