Last year, just prior to Memorial Day, the U.S. House passed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) by a vote of 417 to 3. For months it sat dormant, waiting for the Senate to approve and ultimately pass it on to our President for his signature.
I honestly didn’t think it would get through in time for the 2020 tax year, but at the 11th hour it did. Unfortunately, it was part of the package that kept our government open, operating and spending without benefit of a real budget.
I say unfortunate because, in the big picture, we still don’t have a federal budget. Washington just continues on the same spending path, and without a budget our federal debt continues to balloon. The long-term danger is that if our nation continues to spend far more than it takes in, such unchecked spending will likely lead to financial issues down the road.
Nevertheless, the SECURE Act will benefit many in their late sixties and early seventies. I believe the most important provision in the bill is that the age for the mandatory Required Minimum Distributions (RMD) has been raised from 701/2 to 72.
People are not only living longer, but also working well beyond the traditional age of 65, the new law gives them more time to save and invest. The benefit, of course, is the opportunity to grow their retirement accounts a couple of years longer without a mandated withdrawal.
Although not yet released, I think we’ll soon we see a new government table that reflect longer life expectancies. If they do modify the tables as I anticipate, mandated distributions will not only start a bit later, but the amount required to withdraw at each age level will also decrease slightly. Again, an adjustment that takes increased longevity into account.
This all bodes well for people trying to save a bit more for their retirement years. But everything about the SECURE Act isn't positive. There is also a negative element, specifically for non-spousal beneficiaries of IRA accounts.
Prior to this year, non-spousal IRA beneficiaries could keep their inherited IRA growing indefinitely. Of course, they still had a mandatory minimum withdrawal requirement and had to pay taxes on the amount withdrawn. But as long as there was money in it, the account could go on forever.
Unfortunately, that changed with the new bill. Now, the longest a non-spousal beneficiary can keep an inherited IRA growing is ten years beyond the IRA owner’s death. At that point, the account must be cashed out and all the required taxes need to be paid on the balance.
A lot of households who did extensive estate planning with their attorneys to incorporate the inherited IRA will now have to review and modify their estate planning to adjust for the new mandate that inherited IRAs be cashed out. I’ve kiddingly said that every time Uncle Sam changes the rules it benefits the legal profession. This time is no exception.
There are other provisions in the Secure Act such as allowing small businesses to unite offer a 401(k) plans, and allowing the use of funds in 529 college savings program to pay off student loan debt.
As further details become available, I will discuss and explain. Stay tuned.