Feeling Insecure About The SECURE ACT?
The SECURE Act (Setting Every Community Up for Retirement Enhancement Act) was signed into law and became effective on January 1st 2020. Well, we had a pandemic on our minds, and you may have missed some of the highlights. The rules changed, and guess what? They changed again early this year. Here are a few of the SECURE Act highlights, the interpretation from the IRS from February of 2022 and some considerations on how to feel more secure. First the highlights:
- If you were born on or after July 1st 1949, you have until April 1st the year following your 72 birthday to start taking your required minimum distributions.
- If you have earned income, you can continue to contribute to your traditional IRA after age 70 ½.
- If you inherit an IRA, 401(K) or other defined contribution plan, and you don’t qualify as an eligible designated beneficiary (spouse, disabled, minor child, or not more than 10 years younger than the account owner), you NO LONGER qualify to take the stretch IRA. A stretch previously allowed any beneficiary of an IRA to take a minimum distribution over their own lifetime.
- ROTH conversions were made more attractive for those who want to reduce future tax bills for themselves and their heirs. You have more time before your RMD starts at age 72.
- If you are working part-time (at least 500 hours a year), you will qualify for your employer sponsored retirement plan after working three years.
Here is one of the IRS rulings, the interpretation that came out on February 24th of this year and an example of the impact.
- If the deceased owner of an IRA was taking their Required Minimum Distribution, a non-eligible designated beneficiary (non-spouse, certain trusts) need to continue to take an RMD AS WELL AS drain the account before the end of year ten years after the IRA owner’s death. If the account owner died before they started taking an RMD, you qualify for the 10-year rule.
We have a client who inherited an IRA from his uncle, who passed away at age 87 the beginning of 2021. Our initial planning looked at keeping the funds in an inherited IRA until the client and his wife both retired in about seven years. This would allow the funds to grow tax-deferred and we would strategically wind down the account before the tenth year after death based on their cash flow needs post retirement and tax environment. With this updated ruling, we needed to go in and calculate the required minimum distribution based on the account value of 12/31/21, his age and life expectancy. We contacted the client to share the ruling change as well as the amount he would need to take out for 2022. With the market volatility earlier this year, we opted to revisit his account later in the summer and take the required distribution out of the income/earnings he will be receiving over the course of 2022 instead of tapping into the lower account value in February.
Here are some ideas to become more secure around the Secure Act:
- Although you can wait until the April 1st following your 72nd birthday to take an RMD, you would need to take two distributions in that year. How will this impact your taxable income? You could you consider doing a Qualified Charitable Distribution to keep the income off your tax return.
- Current tax law will sunset in 2025. Since IRA’s are taxed as ordinary income, you want to be strategic about when you take money out. It may be better to get taxed now in a lower tax environment.
- ROTH accounts are not subject to the RMD new rules for non-eligible designated beneficiaries. This may make the ROTH IRA conversion more attractive for those wanting to leave money to heirs even though the ten year withdrawal rule still applies.
I also encourage people to look to sources outside and beyond their investment accounts for their ultimate “security”. These may include a faith practice and optimizing your character assets such as resourcefulness, creativity, collaboration, or diligence to name a few. Financial resources are important and optimizing how to utilize them paramount. In reality, money will never provide you with full “security”. That freedom comes from the inside!