Securities and Insecurities about the Upcoming Secure Act

The Secure Act is on the House’s agenda and it brings with it a series of implications for investors of all types. We see some of these as favorable and others as potentially not as beneficial depending on your circumstances. Here are the three major aspects that we see as most impactful and what they may mean for you.

#1:  Required Minimum Distribution (RMD) starting age will be changed to age 72 instead of 70½

Under this new provision, you can delay taking your Required Minimum Distributions, or RMDs, from your IRA accounts until age 72.

One opportunity that comes from taking your RMDs later is that it gives you another year and a half longer to perform a Roth conversion.

A Roth IRA offers you tax free growth on the assets in your IRA account as well as tax free withdrawals.  The best time to convert your traditional IRA to Roth IRA is during years when your tax bracket is lower. For many people this is your initial retirement years (before you are forced to take RMDs which will likely to put you in higher tax bracket). If the RMD starting age is changed to 72, this will give you a longer period of time to convert to a Roth IRA.

Example:

Beth decided to retire from her engineering job at age 65. While working she had been in the 35% tax bracket. Once she retires, her tax bracket will become 22%. It would be a good time for her to convert some of her IRA funds to a Roth IRA to take advantage of the 22% tax rate. She should convert these funds before she is forced to start her RMDs and lose the ability to remain in the lower tax bracket.

For an unconventional tip on planning during tax season, please read our blog here.

#2 From Stretch IRA to Compressed IRA

The bill may require non-spousal beneficiaries to withdraw the money from an IRA within 10 years instead of over the beneficiary’s life time. 

This would pose less of an advantage to investing in a Roth IRA for those who are looking to leave money to a successor.  

The good thing about knowing this in advance is that it allows for time to make changes to your estate plan. It motivates the investor to think more strategically about what they are leaving and to which beneficiaries. People who feel their non-spousal beneficiaries may need to receive the money over a longer time horizon may wish to consider other vehicles than an IRA.

Example:

Carla has two children. One of them has a condition that will require her to be dependent upon her inheritance for cash flow on a permanent basis. Knowing that her child has a need for longer term funding, Carla should re-evaluate her estate plan and perhaps consider using annuity or create a trust to ensure the continuity of funds for her child. 

While the Act may allow exceptions to the 10-year distribution rule for minors or disabled inheritors, the provisions will have to be evaluated closely.

#3 Removal of Age Limitation for IRA contributions

Under this provision, people older than age 70½ may continue contributing to an IRA if they have earned income.

We see this as a benefit for those who wish to pursue a less traditional route. The nature of retirement is changing. For example, many people retire and start a business or pursue part time consulting work after leaving their full time employment. Under the new act these people will still be able to save money in a retirement account for as long as they wish.

Example:

Randy wants to stay busy during retirement by consulting for his former employer. As long as he continues to earn income he can sock away money into his IRA and have it grow tax deferred.

Summary on the Secure Act and its implications

If the Secure Act is signed into law, it is hard to say if it will make life easier or harder for any investor. It all depends on your personal financial situation. Questions on how this may impact you? Contact us to set up a time to speak.

Contributor

Ellen Li, CFP® is a lead advisor with Financial Alternatives in La Jolla, CA. When she’s not rock climbing at the gym, she’s focused on helping clients with tough financial planning questions uncovered as part of the EXPERT™ Advisory Process.  Set up a time to chat about your situation or her latest climbing destination.