SECURE Act: How This New Law Might Impact Your Financial Plan

Ken Weingarten |

A few weeks ago, the SECURE Act was passed which has made some significant changes that can affect one’s financial planning strategies. Below are several important provisions you should keep in mind going forward:

Stretch IRAs

This may be the most significant change which can dramatically impact one’s taxes. Inherited IRAs or other retirement plans (401ks, 403b plans, etc..) no longer have the option to take Required Minimum Distributions over the beneficiary’s life expectancy. Instead, Inherited IRAs must be completely distributed over a 10-year period.

There are important exceptions to keep in mind:

  • IRAs or Retirement Plans inherited by a spouse will still be able to take Required Minimum Distributions over their life expectancies.
  • Individuals who have inherited IRAs or Retirement Plans by the end of 2019 will still be able to take Required Minimum Distributions over their life expectancies.

Required Minimum Distribution Age

Individuals will now have to begin taking Required Minimum Distributions at age 72 (pushed from age 70 ½ under the old rules). Individuals who have turned 70 ½ and begun taking Required Minimum Distributions by the end of 2019 must continue taking Required Minimum Distributions.

Age Limit for Traditional IRA Contributions

Under the old rules, one could make contributions to a Traditional IRA up until age 70 ½. With the passing of the SECURE Act, this age restriction has been lifted. Any individual, over the age of 70 ½, can make contributions to a Traditional IRA, provided they have earned income.

(Note: Roth IRA contributions still do not have an age restriction. This has been left unchanged by the SECURE Act.)

Kiddie Tax Rates

One of the provisions of the Tax Cuts and Jobs Act (TCJA) was to tax a child’s unearned income at higher tax rates for estates and trusts rather than at the tax rates of the child’s parents. The SECURE Act has repealed this change, thus reverting to the rules that were in effect before the TCJA. A child’s unearned income will be taxed at the rates of their parents.

Required Minimum Distributions - Calculation Changes

This development is not a provision of the SECURE Act, but it is important nonetheless. Beginning in 2021, the IRS will set forth a change its life expectancy table for the calculation of RMDs. Below is a chart illustrating the differences in withdrawal rates:

 

 

While the SECURE Act has made several other changes not covered here, one should keep the ones listed above in mind as they are more likely to impact one’s financial situation. Individuals are strongly encouraged to speak with their financial advisor to better understand the implications to their own situation.