How the SECURE Act Could Affect You
President Trump’s SECURE Act went into effect on the first of this year. The act, which is an acronym for Setting Every Community Up for Retirement Enhancement, is expected to generate about $16.4 billion in revenue over the decade. In particular, it will generate government revenue by limiting the ability of people to receive income from individual retirement accounts (IRAs) using the “stretch” option. There are other changes that residents of The Villages should consider.
What Was the Stretch Option?
Under the old law, an IRA or 401(k) could be stretched for the life of any beneficiary. This meant you might leave your IRA to your child, who inherits it at age 45 upon your death. She could have the income stretched out for her entire life expectancy by taking required minimum distributions. That option is going away with the implementation of the SECURE Act.
Instead, for most beneficiaries, the entire account needs to be distributed within 10 years of the account owner’s death. The theory is that IRAs and 401(k)s were created to help fund a person’s retirement, not to pass wealth on to the next generation. This is a debatable proposition, but it was the motivation for the law.
Who Is Exempted from the New Rule?
Some people can still stretch out their distribution. The following are not subject to the 10-year distribution rule:
- A surviving husband or wife
- Minor children—but they will become subject to the 10-year rule when they reach majority status
- A chronically ill or disabled person
- A person who is less than 10 years younger than the individual who owned the IRA
If you named your spouse as the beneficiary of your retirement account—and many do—then the SECURE Act should not have an effect. But many people pass their accounts on to their children, who will be subject to the Act when they turn 18.
What Are Other Changes?
The SECURE Act made other changes to the law that might affect you. For example, the old law required that account owners start taking required minimum distributions at age 70.5. Now, the age has changed to 72, which reflects the fact that people are living and working longer.
There is also no age limit for contributions to a traditional IRA. Previously, the age limit was 70.5. Those who continue to work into their golden years can continue to sock away money.
There is also good news for those who have recently adopted or had a baby. They can avoid the 10% early withdrawal penalty for any withdrawal up to $5,000. However, they will still have to pay taxes on the withdrawn amount even though the penalty is eliminated.
Confused? Contact an Estate Planning Attorney in The Villages Today
Because of the SECURE Act, some members of The Villages might want to revise their estate plans or change how they save money for their children. At Millhorn Elder Law Planning Group, our estate planning attorneys stay abreast of changes that affect our community. To speak with a member of our team, please call 800-743-9732 today.