Insights

The New Year not only ushered in a new decade, but it also ushered in some of the most significant changes to retirement legislation in almost 15 years. The Setting Every Community Up for Retirement Enhancement Act—otherwise known as the SECURE Act—went into effect on January 1, 2020, and it could affect the way you save for retirement.

The House of Representatives passed the SECURE Act last spring, and President Trump signed it into law on December 20. It marks the first major piece of retirement legislation that has been passed since the Pension Protection Act of 2006. The new retirement act, which was designed to boost retirement savings, makes significant changes to IRA, 401(k), and other qualified retirement accounts. Here are three ways the SECURE Act will impact investors who use IRAs to save for retirement.

1. The SECURE Act raises the age for required minimum distributions. Currently, retirement savers who use traditional IRAs are required to start taking required minimum distributions (RMDs) from their retirement account at 70½. (RMD rules do not apply to Roth IRAs while the owner is alive.) The SECURE Act pushes back the age at which RMDs must begin to 72. Raising the RMD age gives investors another year and a half to enjoy the tax-deferred growth of their IRA investments.

That additional time could be significant for IRA owners. Many retirement savers begin taking RMDs at 70½ not because they want to, but because they must. Data from the Employee Benefit Research Institute (EBRI) shows that individuals who own traditional IRAs and are 70½ or older are the primary drivers of IRA withdrawal activity.

At Pacific Premier Trust, where we custody alternative assets for self-directed IRAs, we’ve seen clients convert from traditional IRAs to Roth IRAs simply to avoid RMDs. But a Roth conversion comes with tax implications and is not always in an investor’s best interest. Given that many retirees are living longer and are not always ready to pull money out of an IRA at 70½, gaining 18 additional months to grow an IRA without needing to make withdrawals could be significant.

2. The SECURE Act repeals the age cap for contributing to traditional IRAs. As the law used to stand, there was no age limit on making Roth IRA contributions, but retirement savers were not allowed to make regular contributions to a traditional IRA after age 70½. While the SECURE Act did not change anything about contributing to a self-directed Roth IRA—there continues to be no age restriction for Roth contributions­­—it did change with respect to contributions to traditional IRAs. Now, savers who are still working and receiving earned income can make contributions to traditional IRAs regardless of age.

This age change—much like the decision to raise the RMD age requirement—acknowledges that Americans are living and working longer, and it provides more time to accumulate a bigger nest egg.

3. The SECURE Act eliminates “stretch” IRAs. This is one of the more controversial IRA changes in the SECURE retirement act. Previously, non-spouse beneficiaries who inherited an IRA could “stretch” the RMDs from that account throughout their lifetime, allowing the IRA to continue to compound year after year on a tax-free or tax-deferred basis. Stretching the life of an IRA provided the potential to grow a small IRA into a very large one, allowing it to serve as a substantial inheritance for future generations.

However, under the SECURE Act, most non-spouse IRA beneficiaries now must withdraw all funds from the retirement account within 10 years of the IRA owner’s death—effectively eliminating stretch IRAs. (There are several exceptions including beneficiaries who are minors, disabled, or chronically ill.)

Given this change, IRA owners may need to rethink their estate planning strategy and reconsider the benefits of accumulating a substantial IRA. After all, beneficiaries who inherit a large IRA and must draw down the account within 10 years could face significant tax bills on their yearly distributions.

While this change has attracted a fair amount of criticism, we find that stretch IRAs are the exception rather than the rule. At Pacific Premier Trust, most inherited IRAs we encounter are on the smaller side and are liquidated well before hitting the 10-year mark. First and foremost, IRAs are designed to fund an individual’s retirement, not the retirement of children and grandchildren. There are separate estate planning tools that can be used to provide for future generations.

The SECURE Act’s bottom line

The SECURE Act does not represent groundbreaking new retirement legislation, but it could impact the way you save for retirement and your estate plans. Please consult with your tax professional, financial advisor, or attorney to determine how this new law could impact your financial future and to ensure you’re on your way to building a secure retirement.

To learn more, call us at 800.962.4238.

This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.

Pacific Premier Trust (formerly PENSCO Trust Company) performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. Pacific Premier Trust is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.

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