Secure Act and what implementation will mean to the average individual

Dale Immekus |

The Secure Act has been passed by the house ratified by the senate and signed into law by the president December 20th, 2019. As written, it will go into effect January 1, 2020. What this means to you and changes you might need to make will depend on your individual situation. Some of the changes all retirement investors should be aware are discussed below.

The maximum age for contributions to traditional IRA’s will increase from age 70 ½, to age 72. This means that if at least one spouse has earned income, you may contribute to an IRA for you or a spouse, or both, up until you are age 73. If one spouse is age 73 and the other spouse is younger, than contributions to the younger spouse’s IRA is still allowed if there is earned income from either spouse. Once both spouses are age 73, they will not be allowed to make contributions to traditional IRA accounts.

The age for Required Minimum Distributions (RMDs) has increased to age 72. RMDs are the distribution amount from an individual’s retirement accounts which the government requires to be withdrawn so that taxes can be collected from these tax deferred accounts. Prior to the Secure Act, RMDs needed to be withdrawn the year in which an individual turned age 70 ½.  For example, if an individual is age 70 ½ prior to year-end, then RMDs must be withdrawn from the account prior to December 31st of that year. If the RMD is not withdrawn before year-end the federal government will penalize the taxpayer 50% of the amount which should have been withdrawn and will still require that the RMD be withdrawn. Uncle Sam really wants that tax money.

There are both pros and cons with the Secure Act and this may be confusing for many. It is a positive that individuals may wait longer to begin withdrawing from their retirement accounts. This will allow more time for deferred growth in these accounts which is good for the account holder. Also, as noted previously these individuals could continue to fund their traditional IRA until age 72, another positive. However, there are some negatives.

If an individual has turned age 70 ½ prior to December 31, 2019; they will have begun taking RMDs and will be required to continue taking distributions or face tax penalties. For those individuals who have not turned 70 ½ prior to December 31, 2019; they will not be required to begin RMDs until the year they turn age 72.  For those individuals who find themselves under age 72 but older than 70 ½, they will be required to take RMDs. So that is a negative. 

Another negative change from the Secure Act is to beneficiary or inherited IRAs. Previously an individual who inherited a retirement account could stretch the RMDs based on their own life expectancy.  After passage, inherited IRAs must be fully distributed by the end of the 10th year. For example, if an individual inherited an IRA worth $500,000; then they would need to take approximately $50,000 per year for ten years. This is taxable income on top of any other income earned. If the same individual waited until year ten to withdraw the entire value at once, then that would be $500,000 in taxable income in one year. So, whether you take the withdrawals over the course of ten years, all at once or somewhere in between, this will have an impact on your taxable income.  These sample numbers do not account for potential growth in the account. The government wants tax revenue, and this will bring in plenty at the expense of taxpayers. This is a negative which will require planning to make lemonade out of lemons.  

I prefer to end on a positive so here a few. Penalty-free withdrawals for new parents is a positive. A withdrawal up to $5,000 can be made to cover expenses for birth of a new child or adoption services.  Taxes are still due on monies withdrawn but this may help with those expenses. Individuals can also withdraw as much as $10,000 for student loan payments. Again, taxes would be incurred but this should help those in need with overwhelming student debt.

The above represents only a few of the many changes to retirement plans. The changes discussed are some of the most important effecting a very large number of people. We will keep you abreast of further implications regarding the Secure Act and any other concerns in these areas. As always, remember to use your team of professionals and until we talk again, be well.

Registered Representative offering securities and advisory services through Independent Financial Group, LLC (IFG), a registered broker-dealer and investment advisor.  Member FINRA/SIPC.  Dedicated Financial & Insurance Services and IFG are unaffiliated entities