Late last year, Annuity FYI wrote about the pending passage of the Setting Every Community Up for Retirement Act – better known as the SECURE Act – and outlined the key elements of the legislation. Now that it has actually become law, it’s worth focusing on how seniors can best reap the benefits.
What probably counts most for seniors is that the SECURE Act relaxes Required Minimum Distributions (RMDs) from qualified retirement plans and increases lifetime income options in retirement plans.
At this juncture, here are some key things you should know:
- Because of the SECURE Act, seniors are no longer required to start making withdrawals from retirement accounts until age 72. As the rule transitions in, it begins at a sliding upside scale at 3.65% rising annually thereafter. (Folks who haven’t reached age 70 ½ by the end of 2019 don’t have to start withdrawing funds from their retirement accounts until age 72.) When funds are withdrawn, recipients do have to pay their ordinary tax rate on the funds.
The delay of the withdrawal start date means that seniors have additional time to allow their IRAs and 401(k) increases to grow without being reduced by distributions and income taxes. The thinking behind this is that people are living longer and therefore need the benefit of relaxed withdrawal rules.
Here are additional changes that seniors should be aware of:
- The SECURE Act now increases retirement savings opportunities in a number of ways. Before it became law, you could not contribute to a traditional tax-deductible IRA after 70 ½. Now you can. This may appeal to people who are in their early 70s and still working, at least part-time. Such folks can receive a valuable tax deduction and save more for the future.
- The new law also provides seniors with additional Roth IRA planning flexibility. The new law gives you an additional two years to make what are known as Roth IRA conversions without worrying about the impact of required distributions.
With a Roth IRA, unlike a traditional IRA, withdrawals are tax-free if you meet select requirements. The goal of a Roth conversion is usually to convert taxable money in a traditional IRA into a Roth IRA at today’s tax rates, especially if you are assuming that tax rates will increase in the future. Even if your tax rate doesn’t increase, you may still prefer a Roth IRA over a traditional IRA because you might want to have a lower tax burden as you age – perhaps because your medical expenses might increase.
You can start Roth conversions after you start RMDs, but the process is a lot more complicated.
- The SECURE Act makes it easier to continue to save, if you so desire. Age limits for fresh contributions are now gone for both traditional and Roth IRAs. (Even if you’re not working, you may be receiving more income than you need from, say, so-called alternative investments, and would prefer to invest the money, rather than save it. You could invest in another retirement account but do not have to.)
- Given that the SECURE Act is one of the largest legislative changes in retirement rules in nearly 14 years, it may be a good idea to talk to your financial professional and/or tax adviser how about how to react. Regarding Roth conversions, for example, you should examine forward-looking tax projections to determine whether you believe that your future tax rates are likely to go up or down.
If you think they will go down – not as improbable as it may seem given that President Trump is already said to be weighing another tax cut should he be re-elected – a Roth conversion may not be the right move. Instead, you will want to consider minimizing current taxes.
None of this should suggest that the SECURE Act doesn’t have its critics. They contend the changes in the law are ultimately underwhelming and, in any case, sidestep bigger financial issues in retirement, such as the rising cost of health care and long-term care insurance.
Still, the new law is generally considered a step in the right direction.
According to Statista, the average male baby boomer will live until age 76 and their female counterparts five years longer – near record-highs. Longer life expectancy increases the chances of retirees outliving their savings. So more opportunities to invest more and delay tax payments are obviously a positive.
Editor’s Note: Annuity FYI does not offer tax or legal advice. Always consult with qualified tax/legal advisors concerning your own situation.
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