Clients and friends of Keen Wealth have questions surrounding the Setting Every Community Up For Retirement Enhancement (SECURE) Act that was passed at the end of 2019. And with good reason! In many ways, the SECURE Act represents a significant rethink of retirement and estate planning. The government has recognized that as folks begin working longer at a wider variety of jobs, individuals need to start taking more personal responsibility for their retirement planning. This shift will affect your own retirement and how your heirs will approach their financial planning.
On today’s show, we follow up our earlier overview of the SECURE Act with a deeper dive into three specific topics that our clients have been asking us about. As always, we try to keep the conversation light on industry jargon and technicalities. But the better you understand some of the SECURE Act’s most significant changes to retirement planning, the more confident you’re going to feel about your own plan.
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72 is the new 70 ½.
Retiring at age 65 isn’t the automatic decision it used to be. As pensions disappear and health care costs go up, some folks are working into their 70s because they feel like they have to. As life expectancy and general wellness increase, some folks are working longer because they can, and they want to.
The government has decided to provide working seniors with a bit of an extra cushion. As long as you’re earning income, you can keep making contributions to a traditional IRA. You’re no longer cut off from making those contributions at age 70 ½. And since seniors can now make those contributions longer, the SECURE Act also raises the age at which you have to start taking required minimum distributions (RMDs) from your retirement accounts from 70 ½ to 72.
Some of our clients who passed 70 ½ in 2019 have been asking if they get to skip a year of RMDs in 2020, when they’ll only be 71. The answer, unfortunately, is no. The SECURE Act’s new rules only apply to folks who turn 70 ½ after January 1, 2020. If you’re already taking RMDs, you probably have to keep taking them, so make sure you talk to your fiduciary advisor before changing your withdrawal schedule. As we’ve discussed before, failure to take your correct RMDs on time can subject you to a hefty penalty from the IRS.
Don’t “abuse” your QCDs.
Once you do start taking RMDs, making qualified charitable distributions (QCDs) from your retirement accounts can be a beneficial strategy for lowering your tax burden and maximizing your generosity. Under the SECURE Act, QCDs are still tax free. You’re also still allowed to start making QCDs at 70 ½ even if you’re not taking RMDs yet.
However, the SECURE Act does put limits on how much of your taxable income you’re allowed to minimize using QCDs. If you try to make a large QCD once you do retire and start taking RMDs, the QCD will be reduced by the total amount of contributions you made to your retirement account after age 70 ½.
For example, if you made $7,000 contributions into your IRA for 4 years after turning 70 ½ (a total of $28,000), and you decided to make a $40,000 charitable contribution upon retirement, you’d only be allowed to make a QCD of $40,000 – $28,000, meaning $12,000. If you still wanted to write that $40,000 check, the remaining $28,000 would be part of your itemized deductions.
OK, I don’t want to turn the rest of this recap into a math quiz drowning in alphabet soup! One benefit of working with a fiduciary advisor is that we run all these numbers to figure out the best course of action for your particular portfolio. The bottom line is: if you plan on giving to charity once you retire, talk to your advisor about how the SECURE Act will affect your plan.
No more “stretching.”
The SECURE Act eliminates “stretch” distributions from inherited IRAs. That means your heirs can no longer reduce their annual tax burden by “stretching” out distributions from an inherited IRA based on the IRS’s life expectancy tables. Now, beneficiaries have to finish taking distributions within 10 years of inheriting an IRA. Spouses and minor children who inherit an IRA are exempt from this change, as is anyone who inherited an IRA before the end of 2019. Further, if you have a trust as a named beneficiary of an IRA, you should review those documents with your attorney in the near future as some of the language may need to be updated.
On the one hand, I understand why folks are upset about this change, especially seniors with large IRAs who had done quite a bit of estate and tax planning around the old rules. But, on the other hand, the government never intended the IRA to be an estate planning tool. The IRA was designed to take care of retirement for you and your spouse.
We talk a lot on our show about controlling the things we can control so that your retirement plan is flexible enough to adapt to things we can’t control. The SECURE Act is one of those variables. Yes, most of these changes have been discussed in Washington for months. But the SECURE Act isn’t a discussion anymore, it’s the law. If you just retired or are about to retire, it’s important that you schedule a meeting with your Keen Wealth advisor so that we can go over how the SECURE Act affects these and other financial tools that are critical to the security of your retirement.