What Is the SECURE Act and Other Retirement Reform Questions

Five things you need to know about the recently-enacted legislation that could impact your retirement and how you plan for retirement.

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You have worked hard throughout the years to financially plan for your retirement. Part of that hard work applies to staying up to date on financial rules and federal regulations that impact the industry.

In December 2019, the U.S. House and Senate passed significant reform legislation designed to help Americans better prepare for retirement. Here are some things you should know about the Setting Every Community Up for Retirement Enhancement (SECURE) Act and how it could affect your retirement plans:

Q: What is the SECURE Act?

A: The SECURE Act was signed into law Dec. 20, 2019, by President Donald J. Trump. The new bipartisan legislation includes provisions for individual retirement accounts (IRAs), 401(k) plans and the required minimum distributions (RMDs) age.

Americans are living and working longer, and this act is aimed at helping people better financially prepare for a longer life in retirement.

Q: How will the age increase on required minimum distributions (RMDs) affect me?

A: RMDs are the minimum amount a person must draw from their retirement plan account each year, once they hit a certain age. With the SECURE Act, the RMDs age increased from 70 ½ to 72. This change gives people approximately two additional years for their finances to grow tax-deferred in retirement accounts and plans such as IRAs and 401(k)s.

It is important to note if you turned age 70 ½ on or before Dec. 31, 2019, your first distribution needs to be made by April 1, 2020, which is still considered the distribution for 2019.

More information on RMDs is available on the IRS website. This information does not cover changes made to RMDs, for 2020 only, as a result of the CARES Act. Please click here for additional information on RMDs in 2020.

Q: Is the stretch option for inherited IRAs being eliminated?

A: A “stretch IRA” is not a type of IRA but, rather, references a financial planning strategy for the beneficiary of an IRA account that extends tax-deferred benefits. The SECURE Act limits the individuals who can stretch inherited IRA funds if the original owner of the IRA passed away on or after Jan. 1, 2020.

Under the SECURE Act, if the original owner of an IRA passed away on or after Jan. 1, 2020, the stretch option is limited to “eligible designated beneficiaries” which includes surviving spouses and a select group of beneficiaries, including individuals who are: (1) older than, or not more than 10 years younger than, the original IRA owner, (2) disabled, (3) chronically ill, or (4) a minor child (however, the minor must be a child of the original IRA owner, a grandchild or other relative is not included). All other individuals no longer have the stretch option available.

However, if the original owner of an IRA passed away on or before Dec. 31, 2019, the stretch option is still available to all individual beneficiaries (i.e. a natural person).

Q: What tax-deferral option is available to beneficiaries who no longer have the stretch option?

A: Previously, most beneficiaries of the original IRA owner generally had the stretch and 5-year deferral options to extend tax-deferred benefits. In addition to eliminating the stretch option for many beneficiaries, the SECURE Act also replaced the 5-year deferral option with the 10-year deferral option for individual beneficiaries if the original IRA owner passed away on or after Jan. 1, 2020. 

The 10-year deferral option can extend tax-deferred benefits for beneficiaries who no longer have the stretch option. Funds must be withdrawn within 10 years. Year 1 begins January 1 following the year of the original IRA owner’s death. The beneficiary may withdraw the funds at their discretion, regardless of the amount and frequency. 

The 10-year deferral option is available only to individual beneficiaries (i.e. a natural person). Non-natural beneficiaries, such as a charity, estate, business, and certain types of trusts, are still limited to the 5-year deferral option. 

Q: What is happening with the maximum age limit for traditional IRA contributions?

A: With the SECURE Act, there was a repeal of the maximum age for traditional IRA contributions. Before Jan. 1, 2020, once you reached 70 ½, you could no longer make contributions to a traditional IRA. Since people are living longer in the retirement phase of their life, that age limit has been eliminated to help them with their long-term finances.

Now, there are no longer any age restrictions to make contributions to a traditional IRA. However, there are still compensation requirements to contribute to an IRA, and these requirements have not changed under the SECURE Act.

 Q: What’s my next step?

A: It’s important to note the SECURE Act is subject to interpretations from the Internal Revenue Services or other authorities, and provisions may change without notice. If you are seeking advice, it is recommended you consult a qualified tax professional.

Whether you’re close to retirement age or are in the beginning stages of your career, strengthening a long-term financial plan starts with understanding how legislation impacts your retirement and the steps you can take to protect your future income.

 

Source: The Setting Every Community Up for Retirement Enhancement Act of 2019 (The SECURE Act)
Please see the SECURE Act, starting on page 604 of the Further Consolidated Appropriations Act, 2020. https://www.congress.gov/116/bills/hr1865/BILLS-116hr1865enr.pdf

The content is provided for informational purposes only and does not constitute advice. For specific details on how this may apply to your personal situation, contact your personal financial advisor or insurance agent for more details. American Equity contracts are only sold through independent agents. Please contact your state insurance department to see if there is an independent insurance agent in your area appointed to sell American Equity annuity contracts. 
American Equity Investment Life Insurance Company® does not offer legal, investment, or tax advice. Please consult a qualified professional.