How the SECURE Act Will Change Your Retirement Distributions

One of the most visible aspects of the new SECURE Act is the removal of the age cap on contributing to a traditional IRA, which previously had come into play starting in the year you turn 70. But there’s another cap that’s been increased, one that could also affect your long-term plans: The law raises the prescribed beginning date for taking required minimum distributions (RMDs) from age 70 ½ to 72.

RMDs apply to 401(k) plans — both traditional and the Roth version — and similar workplace plans, as well as most individual retirement accounts. (Roth IRAs do not incur required withdrawals until after the account owner’s death.)

Why Does This Matter to You?

If you’re already relatively comfortable heading into your retirement, and don’t need to tap into your savings right away, the relaxed RMD rules give you the chance to let your assets keep on growing a little bit longer. It’s a small but potentially significant difference.

If you’re on the border of 70, here are a couple of caveats:

• This only applies if you turn 70 ½ after 2019, so anyone who was 70 ½ in 2019 or earlier is not affected.
• If you turned 70 ½ in 2019 and have not yet taken your initial RMD for that year, you must take that RMD, which applies to the 2019 tax year, no later than April 1, 2020. Otherwise, you could be slapped with a 50% penalty on the shortfall. You must then take your second RMD, for the 2020 tax year, by the end of the year.

If you want to get out of taking any RMDs, there’s an option for you: Keep working past the age of 70, and keep contributing to your employer’s retirement plan. If that describes you, and you don’t own more than 5% of the company you work for, you can wait to take your RMDs from that employer’s plan until after you’ve retired.

Death of the Stretch

There’s another change to RMD regulations resulting from the SECURE Act that has killed off the so-called Stretch IRA. In the past, non-spouse beneficiaries could opt to take only required minimum distributions, stretching them out over their life expectancy.  A 40-year-old inheriting a deceased parent’s IRA, for example, could theoretically end up taking distributions for more than three decades.

Now, the SECURE Act mandates that most beneficiaries must withdraw the entire balance of an inherited IRA within ten years of the IRA owner’s death. The inheritor isn’t really losing any assets, but the time that those assets can be invested within the IRA is now severely limited.

If you had set up an IRA with a “stretch” provision in the back of your mind, you have a few options. You can replace it with a Roth IRA, which offers your heirs tax-free withdrawals; you can convert a traditional IRA to a Roth at any time. Or you can invest in good old-fashioned permanent life insurance.

In any case, you can no longer depend on an IRA to provide lifetime support for a child. If you have an heir that you think will need financial support over a period of decades, consider a trust instead.

For more information on this topic, on his blog "Finance for the Greater Good," Baird’s John Taft recently wrote about how the SECURE Act will affect Americans’ ability to retire comfortably. If you’re concerned about what changes you should make to your retirement plans in the wake of the SECURE Act, read more here or talk to your Baird Financial Advisor.