On December 20th, 2019 President Trump signed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) into law. The law went into effect on January 1st, 2020 and signals important changes for investors. Below is a brief summary of provisions that will have the greatest impact on our clients’ financial planning and investment strategy.
RMD age increased from 70 ½ to 72.
Prior to the SECURE Act, individuals had to start taking Required Minimum Distributions from their IRAs at age 70 ½. The law has now pushed that RMD date out to age 72. The new law only applies to people who turn 70 ½ after December 31, 2019. Separately, the IRS recently proposed updates to the current life expectancy tables to adjust for longer expected lifespans. The proposal, though not yet finalized, is expected go into effect for RMDs calculated for 2021 and beyond. On a side note, clients may now contribute earned income to IRAs after turning 70 ½.
Stretch provision for most non-spouse IRA beneficiaries eliminated.
Under the old rules, non-spouse beneficiaries of an IRA could take RMDs based on THEIR life expectancy. The new law will require most non-spouse beneficiaries to distribute the entire IRA within 10 years. This applies to IRAs and Roth IRAs. The difference between a 50-year-old taking distributions from an inherited IRA over 35 years versus now having to pay taxes on the entire account within 10 years is obviously quite significant. Exceptions are made where the beneficiary is a minor, disabled, chronically ill, or not more than ten years younger than the deceased IRA owner. For minors, the exception only applies until the child reaches the age of majority, at which point the ten-year rule will apply.
Annuities may now be added to 401K plans.
This one really surprised us. We don’t recommend that clients add annuities in their 401K plans! There are many reasons for our concern, including:
- 401Ks are already tax-deferred investment vehicles thus annuities do not provide additional tax benefits.
- Annuities typically carry high fees.
- Clients may face difficulty passing the assets to beneficiaries if they have annuitized.
- Employers are only legally obligated to evaluate the present health of the insurance company and cannot be held liable if the annuity company folds in the future.
Now may be a good time to review your strategy and plan with one of our Client Portfolio Managers. Please give us a call to schedule a review.