The SECURE Act, or the Setting Every Community Up for Retirement Enhancement Act, is a bipartisan retirement bill that was passed by the House of Representatives and the Senate and became effective on January 1, 2020.
Impacting much of the U.S. population, with 63 percent of U.S. households having individual retirement accounts (IRAs), this new law has many individuals questioning how exactly their retirement savings will be affected.
How the SECURE Act can impact your retirement savings
1. Repeals the maximum age for traditional IRA contributions, which was previously 70 ½.
It’s no question that Americans are living longer, which, for many, raises concerns about their years spent in retirement. According to the National Retirement Risk Index, 50 percent of U.S. households are “at-risk” of not having enough to maintain their living standards through retirement, and “saving more and working longer may substantially improve the outlook.”
As Americans begin to consider working longer, the SECURE Act states that individuals can contribute to their IRAs past age 70 ½ as long as they have the wages to do so. While this directly affects those currently contributing to their retirement savings, it also affects their beneficiaries, providing them with even more funds.
2. Increases required minimum distribution (RMD) age for retirement accounts to 72 (up from 70 ½).
An RMD is a minimum amount that must be withdrawn from a traditional IRA by owners and qualified plan participants of retirement age. Previously, individuals were required to start taking RMDs from their retirement savings at age 70 ½. Now, under the SECURE Act, the age for RMDs has been increased to 72. This applies to individuals turning 70 ½ after December 31, 2019.
Under this rule, individuals must take their first RMD by at least April 1 of the year after they turn 72. For example, if you turn 72 in 2021, you must take your first RMD by April 1, 2022. Similar to the rule above, this creates additional retirement savings for IRA owners and their beneficiaries.
3. Elimination of Stretch IRAs: Distributions of assets must be taken within 10 years of the account owner’s death.
One key component of the legislation of the SECURE Act is the elimination of “stretch” IRAs. Previously, individuals who inherited an IRA or 401 (k) could “stretch” their distributions throughout their lifetime. This made inherited IRAs a reliable source of income for many beneficiaries.
With legislation of the SECURE Act, beneficiaries of inherited IRAs must withdraw all assets from the account within 10 years after the death of the account holder. Exceptions to this rule include assets left to a surviving spouse, a minor child, an individual with a disability or chronic illness, and designated beneficiaries who are less than 10 years younger than the original account owner. If the original account owner passed away before January 1, 2020, beneficiaries do not need to make any changes to their distributions.
How does the SECURE Act impact individuals who plan to leave IRAs to non-spouse beneficiaries?
It’s important for current IRA owners, especially those who plan to leave their assets to non-spouse beneficiaries, to review their retirement savings plans. Prior to the SECURE Act, non-spouse beneficiaries of inherited IRAs could strategically minimize their tax burdens by limiting the amount of their distributions.
In taking a smaller distribution over a longer “stretch” of time, a non-spouse beneficiary had the ability to keep their inherited IRAs in a tax-deferred environment. The SECURE Act now stipulates that non-spouse beneficiaries must withdrawal the entirety of an inherited IRA within 10 years of the owner’s death, which will often result in the assets being heavily taxed. For beneficiaries of inherited IRAs who have a higher income, this is especially concerning as the withdrawals are taxed at the beneficiary’s income-tax rate. Because of the SECURE Act, those with “stretch” IRA plans should be revisiting their retirement savings plans.
Why You Should Consider Designating a Charity as Your Beneficiary
- Reduces taxable income for beneficiaries
- Empowers your philanthropic efforts and the charities your most passionate about
For individuals who were hoping to leave their heirs a lasting financial legacy, designating a charity as your beneficiary may be a great alternative to the stretch IRA that the SECURE Act recently eliminated. This is what’s known as a Charitable Remainder Trust, and it can greatly reduce taxable income for beneficiaries of inherited IRAs while empowering people to pursue their philanthropic passions.
What is a Charitable Remainder Trust?
A charitable remainder trust is a tax-exempt, irrevocable trust that first disperses income to the beneficiaries for a specified period of time and then donates the remainder of the trust to a designated charity. Because the SECURE Act requires non-spouse beneficiaries to withdrawal all assets within 10 years, charitable remainder trusts are an excellent way to disperse income for beneficiaries without the heavy burden of taxes.
Why Give to Liberty Lutheran? Your Support Makes a Difference!
When you designate Liberty Lutheran and our family of services as your beneficiary through a Charitable Remainder Trust, you impact the lives of thousands of older adults and vulnerable individuals every day. Your contribution to our senior living communities supports our benevolent care programs that bring comfort to residents throughout our family of services. Because of you, residents who have outlived their assets know that their community will always be there for them.
Living at Paul’s Run has been a total turn-around for my parents. The physical and mental benefits have given them a whole new lease on life. Paul’s Run is one of the best things that could’ve ever happened to them.
Wendy Keller, daughter of Beverly and Stan Friedman, residents at Paul’s Run
When you support Liberty Lutheran, you also bring hope to underserved communities through our LCFS’ In-Home Support Program (IHSP) and our West Philadelphia Senior Community Center (WPSCC). Your gift provides life-changing support to older adults in West Philadelphia facing economic adversity.
Additionally, your support empowers one of the few long-term recovery efforts programs available to those facing disaster, Lutheran Disaster Response (LDR) – Eastern Pennsylvania. Whether it is responding to local flooding, or helping evacuees get back on their feet hundreds of miles away from home, you help rebuild the lives of those who struggle with hardship and misfortune.
I am so grateful for all of the help my son and I received. Even though I had to leave Puerto Rico and go from place to place, I believe that God has a purpose for everything and that I am finally in the place God wants me to be.
Ada Colón and her son lost nearly everything after Hurricane Maria. LDR and LCS helped them get back on their feet when they relocated from Puerto Rico to Philadelphia.
