The Secure Act: What You Should Know
In January 2020, the U.S. Congress passed the SECURE Act. The legislation is intended to give Americans more flexibility with their retirement and estate planning.
Also known as the “Setting Every Community Up for Retirement Enhancement” Act, the SECURE Act provides several measures designed to help taxpayers, retirees, and others.
While some legislators and their staff obviously spent an excessive amount of time creating the acronym “SECURE,” the law does offer several valuable benefits.
Here are the highlights:
“Stretch IRAs” have been eliminated.
Removing the “Stretch IRA” means that most beneficiaries of an IRA account must now draw down the account within ten years of the inheritance. Taxes will be due in the year following each withdrawal. In the past, beneficiaries could withdraw over their lifetime, only paying taxes for funds as they took them. A surviving spouse or disabled child may still stretch the draw down period over their life expectancy.
Required Minimum Distribution Age Raised.
Until this year, owners of deferred tax retirement accounts have been required to withdraw a minimum specified percentage of the total during the year following their 70 ½ birthday. With the new law, the age to begin withdrawals is now 72 years.
The amount of an RMD is calculated based on the total value of your retirement accounts as of December 31 of the prior tax year.
Maximum Age to Contribute to a Traditional IRA is Eliminated.
Before the SECURE Act, individuals could not contribute to a tax-deferred Traditional IRA once they reached the age of 70 ½. Now, while many individuals continue to enjoy earned income and are retiring later, they may still contribute to their IRA accounts indefinitely.
Note that even though these individuals can continue to make tax-deferred IRA contributions with their earned income, they must still withdraw their Required Minimum Distribution when they reach 72. The RMDs are taxable.
New Parents Can Withdraw from Retirement Plans Without Penalty.
New parents who gave birth to or adopt a child can now withdraw up to $5,000 from their retirement accounts, 401(k) or IRA, without an IRS penalty. In the past, these withdrawals would automatically trigger a 10% penalty by the IRS.
Use 529 Education Savings Plans to Pay Student Debt
Until now, tax-advantaged 529 Plans could only be used to pay for eligible educational expenses like university or other tuition and costs. With the SECURE ACT, individuals can use $10,000 of those funds also to pay down student loans. If you have more than one 529 account and beneficiary, you can apply $10,000 to each beneficiary’s student loan.
Annuities in Retirement Plans
The SECURE Act allows employers to offer a “Safe Harbor” option for employees to select annuities as part of their 401(k) investment portfolios. Annuities are offered by insurance companies and other investment companies to provide a fixed rate annual return that can accumulate in one’s 401(k) account. The employee can begin withdrawing from their accounts at the age of 59½.
Consult with Your Estate Lawyer
With the changes created by the SECURE Act, consulting with a proven and experienced New Jersey Estate Lawyer can make a substantial difference in taxes paid or the net amount your beneficiaries will inherit. Long-term tax implications are in play here, so revising your estate plan may be useful.
In Westfield and Northern New Jersey, make an appointment with the Law Office of Nicholas A. Giuditta III to discuss the long-term implications of this legislation. Some of the changes in law can be positive and offer new opportunities if you make the right adjustments. Some can be decidedly negative for your heirs if you do not act soon.