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How the SECURE Act Could Impact Your Retirement Savings

A new law designed to improve Americans' retirement security could give investors more options for retirement planning, including ways to get more out of IRAs.

by Mark Tosczak - April 28, 2020

A law passed in late 2019 could change the way you think about your retirement accounts.

When the Setting Every Community Up for Retirement Enhancement Act of 2019, also known as the SECURE Act, became law, it changed the rules for employer-sponsored retirement plans, as well as for Traditional IRAs and Roth IRAs. While the new law is meant to improve access to tax-advantaged retirement savings accounts and help keep older Americans from outliving their assets, the changes impact anyone who currently has a retirement savings account.

Here, Cathleen Davis-Whitmore, IRA Product Manager – Vice President at Wells Fargo Advisors, shares four of the most significant changes from the SECURE Act for those who have an IRA.

There are no penalties for withdrawals for some child-related expenses

For families preparing for the arrival of a new child, Davis-Whitmore says, an IRA could now be a way to cover some costs. Under the SECURE Act, up to $5,000 may be withdrawn from an IRA for birth or adoption expenses without incurring the usual 10% penalty. Adoption expenses are allowed for eligible adoptees. (An eligible adoptee means any individual, other than a child of the taxpayer’s spouse, who has not attained age 18 or is physically or mentally incapable of self-support.)

“That’s something to think about for those who may have immediate needs,” Davis-Whitmore says.

However, while there is no requirement to replace those funds, you can. Davis-Whitmore says it’s not clear how long the repayment period will be—regulators are still working out those details. If you decide to take advantage of this provision, Davis-Whitmore says you should consult with your tax advisor.

Inherited IRAs for many have a 10-year distribution deadline

Starting in 2020, if you inherit an IRA, you may face new restrictions on how long you can continue the tax-advantaged growth potential in an Inherited Traditional or Inherited Roth IRA.

“The change that people are feeling the most is the loss, for many non-spouse beneficiaries, of that so-called stretch strategy,” Davis-Whitmore says.

In the past, an IRA beneficiary, could keep the funds in a tax-advantaged Inherited IRA while taking required minimum distributions —potentially for decades. But not anymore.

Under the SECURE Act, most individuals are considered a designated beneficiary and have the 10-year rule to distribute all the assets from an inherited IRA and pay taxes on the taxable amount. The shorter timeframe means beneficiaries have fewer options to time those distributions to help minimize any tax impacts. Eligible designated beneficiaries —spouses, minor children of the IRA owner, disabled or chronically ill individuals and individuals not more than 10 years younger than the IRA owner — can still use the stretch IRA strategy.

If you’re planning on leaving an IRA to an heir, or you’re an heir who expects to receive one, there are strategies that could help, Davis-Whitmore says.

One option is for the Traditional IRA owner to convert it to a Roth IRA. “The designated beneficiaries don’t have to take anything out until the 10th year,” Davis-Whitmore says. “If they let that potentially compound tax-free for 10 years as an Inherited Roth and then take it out, there are no taxes.” (Learn more about Traditional IRAs versus Roth IRAs.)

The age for required minimum distributions is now 72

The SECURE Act increased the age for required minimum distributions (RMDs) from 70½ to 72. That’s the age when people must take withdrawals from an IRA, even if they don’t need the income.

If you turned 70½ on Jan. 1, 2020, or later, your RMD age is now 72, giving you more time to take advantage of the full benefits of having an IRA. “It’s really an 18-month window before you start taking RMDs, so it’s a longer time to tax-defer and potentially get the benefits of compounding,” Davis-Whitmore says. “For those age 70 ½ on or before December 31, 2019 their RMD age didn’t change and is still 70 ½.”

You can still contribute to a Traditional IRA after age 70 ½

The SECURE Act also gives investors another boost. Starting in 2020, Traditional IRA owners older than 70 ½ can continue contributions to a Traditional IRA, as long as they (or their spouses, if filing jointly), are still earning income during retirement. (Contributions for those already 70 ½ or older in 2019 aren’t allowed.)

“That’s a positive,” Davis-Whitmore says, “especially if you have a younger spouse and you’re worried that you are the spouse that will die first, and you want to help take care of the younger spouse.”

Wells Fargo Advisors is not a tax or legal advisor. While this information is not intended to replace your discussions with your tax advisor, it may help you to comprehend the tax implications of your investments and plan efficiently going forward.

Editor’s note: Recently enacted legislation known as the Coronavirus Aid, Relief and Economic Security (CARES) Act includes additional provisions that affect IRA and retirement distributions, to name a few. Your tax advisor can help you understand how this legislation will impact your federal and state tax situation. Your state may not follow these federal laws or may put forth its own legislation.

Mark Tosczak has spent 25 years wrangling words for newspapers, magazines, businesses, nonprofits, and other organizations. He focuses on health care, science, and business.