At the tail end of last year, a bipartisan measure known as the SECURE Act (or Setting Every Community Up for Retirement), was signed into law by President Donald Trump to help address the nation’s retirement savings crisis.
About one-fourth of Americans have no retirement savings. The SECURE Act was designed to change this, enhancing the ability of Americans to save for retirement. The bill includes a variety of notable approaches on this front, including making it easier for small businesses to offer employees 401(k) plans, allowing retirement benefits for long-term, part-time employees and even removing maximum age limits on retirement contributions, which formerly had been capped at age 70½.
Here’s a closer look at some of the most important elements of the SECURE Act, those most likely to directly impact your retirement savings efforts.
Required Minimum Distributions
Perhaps one of the most significant changes contained within the SECURE Act is the increase in the required minimum distribution age, or the age at which you must begin drawing a certain level of money from specific retirement plans in order to avoid tax penalties.
Up until this year, the required minimum distribution age for 401(k) plans and traditional IRAs was 70½. The new bill however changed the distribution age to 72.
That’s good news for those who would like to hold off on tapping retirement funds or who don’t yet need the money. The change allows your money to grow for another year and a half, which is significant and can ultimately translate into a nice boost in your retirement nest egg.
One caveat here. Those who turned 70 1/2 in 2019 will still be required to make their required minimum distributions this year. Failing to do so could incur a 50% penalty.
Roth IRA Opportunities
There’s another bonus associated with the change in the required minimum distribution age to keep in mind. Having another two years before we all must begin taking distributions provides another two years to do what’s known as a Roth IRA conversion.
For those not familiar with this process and its benefits - a Roth IRA conversion involves transferring retirement funds from a traditional IRA or 401(k) to a Roth account.
Traditional IRAs and 401(k) accounts of course are tax-deferred savings vehicles, while a Roth is tax-exempt.
In other words, withdrawals from your Roth are tax-free for those who meet certain requirements. What’s more, there are no required minimum distributions associated with a Roth account.
You now have two additional years to shift funds into a Roth without worrying about the required minimum distributions associated with a traditional IRA.
Eliminated Age Restriction on IRA Contributions
Another very valuable part of the SECURE Act deals with the age limits on contributions to traditional IRAs.
Until last year, contributions were no longer allowed to be made by taxpayers who were 70 ½ or older. The SECURE act does away with this restriction, meaning you can continue squirreling away money in a traditional IRA if you remain in the workforce beyond age 70 ½. This too is good news for retirement savings efforts.
For a married couple, the total impact of this change can be significant. If both spouses contribute the maximum of $7,000 annually, they will be able to save more than $14,000 in 2020, which translates into a sizable tax deduction.
Elimination of Stretch IRAs
Up until 2020, non-spouse IRA beneficiaries were allowed to stretch the required minimum distributions from an inherited account over their own life span. That provision often had the bonus of allowing funds in such an account to grow tax-free for a long time.
The bad news is that this allowance has been eliminated as part of the SECURE Act. Going forward, money from inherited IRAs must be withdrawn by non-spouse beneficiaries within 10 years of the original account owner’s death. This new provision also applies to 401(k) accounts.
One last note about the SECURE Act. It provides a tax benefit for employers who automatically enroll employees in retirement plans. This element of the bill is based on studies showing that participants are more likely to stay in a plan than actively enroll in one themselves.
While it’s entirely possible to opt out of a retirement plan after your employer signs you up for, many employees don’t typically do so. And the sooner you begin saving for retirement, the more opportunity you will have to be truly prepared.
Erickson Braund is the Founder and Chief Financial Officer at Black Walnut Wealth Management. He is a Certified Financial Planner®️ professional and a Chartered Retirement Planning Counselor®️. Eric brings over 20 years of experience working with high net-worth individuals and families, helping them achieve their goals of protecting and growing their wealth for retirement and for generations to come. Because Eric is a CFP®️ professional, he adheres to high ethical standards and engages in at least 30 hours of approved continuing education in the financial industry each year.