Increasing the required minimum distribution age — and contribution age
One of the biggest changes in the SECURE Act is the Required Minimum Distribution (RMD) age being increased 18 months. Rather than people being required to take RMDs at age 70½, RMDs will start at age 72. This will allow workers another year-and-a-half to build their retirement accounts.
And luckily for all concerned, 72 is a less confusing age to deal with than 70½. The starting age increase will certainly lessen confusion by doing away with the half-year issue.
Say Bye-bye to stretch IRAs
Perhaps the change requiring the most urgent attention is the elimination of longstanding provisions allowing non-spouse beneficiaries who inherit traditional IRA and retirement plan assets to spread distributions — and therefore the tax obligations associated with them — over their lifetimes. This ability to spread out taxable distributions after the death of an IRA owner or retirement plan participant, over what was potentially such a long period of time, was often referred to as the “stretch IRA” rule. The new law, however, generally requires any beneficiary who is more than 10 years younger than the account owner to liquidate the account within 10 years of the account owner’s death unless the beneficiary is a spouse, a disabled or chronically ill individual, or a minor child. This shorter maximum distribution period could result in unanticipated tax bills for beneficiaries who stand to inherit high-value traditional IRAs. This is also true for IRA trust beneficiaries, which may affect estate plans that intended to use trusts to manage inherited IRA assets.
In addition to possibly reevaluating beneficiary choices, traditional IRA owners may want to revisit how IRA dollars fit into their overall estate planning strategy. For example, it may make sense to consider the possible implications of converting traditional IRA funds to Roth IRAs, which can be inherited income tax free. Although Roth IRA conversions are taxable events, investors who spread out a series of conversions over the next several years may benefit from the lower income tax rates that are set to expire in 2026.
New Parents and Student loan repayment relief
The SECURE Act will now allow new parents to withdraw up to $5,000 from their retirement plans to cover expenses related to the birth or adoption of a new child, without the 10% early withdrawal penalty. Taxes will still be due on the withdrawals.
It also allows withdrawals of as much as $10,000 from 529 education-savings plans for repayments on student loans. On top of this, the 529 plans may also cover costs associated with registered apprenticeships.
If you should have any questions or concerns on how this will affect you, please contact Mike Nowak at SMG Financial (269) 482- 1056 or click here.