Feeling Insecure about Your Understanding of the SECURE Act of 2019 and How It Will Impact Your IRA? Read On!
This is the first of three posts in our “IRA Updates for 2020” blog series which covers recent developments and ongoing strategies for making the most of your tax-deferred savings. To introduce the series, we’d like to discuss recent developments around the SECURE Act, which hold significant changes for IRA holders in 2020 and the future.
As we mentioned here, at the end of last year, there are three new provisions that savers and retirees need to know.
1. Required Minimum Distributions now Begin at Age 72 rather than 70 ½
If your birthday is after June 30, 1949, you will now have to wait until the year that you turn 72 to begin your required minimum withdrawals. If your birthday is before June 30, 1949, you will remain under the old rules and must begin taking your RMDs no later than April 1 of 2020.
This provision will allow continued deferral for those choosing to wait. It may also create some planning opportunities such as taking strategic withdrawals from the IRA at lower marginal tax rates in the interim, before the RMDs begin. Careful review will be needed to make the best decisions.
2. Changes for Inherited IRAs
The SECURE Act requires IRAs inherited by non-spousal beneficiaries to take 100% of the IRA before the end of the 10th year after inheritance. This provision will not affect current inherited IRAs, only those created after 2019. Distributions for spousal beneficiaries continue to be based on existing IRS mortality tables, allowing longer deferral of taxes for widows and widowers.
This new provision will require important planning decisions for non-spousal beneficiaries. Since there are no required withdrawals for 10 years, the distribution of the IRA balance can be deferred, along with its tax consequences. Depending on the beneficiary’s tax situation and the balance in the inherited IRA, a complete distribution in the 10th year could result in a very large tax liability at higher marginal tax rates. In order to minimize the recipient’s overall tax burden, beneficiaries will need to try and arrange distributions in lower income years if possible, in an effort to minimize their overall tax rate.
3. Age Cap for IRA Contributions is Eliminated
People are working well into their golden years and this change allows them to continue to contribute to their IRAs after age 70 ½, which was the former stopping point. This allows workers to continue to make retirement plan contributions for as long as they are working and will help folks prepare for retirement by continuing to build their nest eggs.
In our next post on this topic, we will discuss the different types of IRA’s and the various contribution limits for each. Stay tuned! If you’d like to make sure you receive the next installments of our IRA series, please sign up to our email list on this page. As always, if you’d like to discuss these changes in further detail and how they might affect you, please feel free to reach out to the Horizon Wealth Advisors team. We are always happy to help!
Horizon Wealth Advisors is a Houston based fee-only wealth management firm. Horizon is a fiduciary advisor. We specialize in helping successful individuals and families understand, organize, and manage their often complex financial situations. Horizon offers integrated financial planning and investment management services.