Key Takeaways
- The new SECURE Act was passed on December 20th, 2019, and it affects retirement distributions.
- There are both positives and negatives associated with the SECURE Act.
- The new rule took effect on January 1st, 2020, and it’s a good idea to know how it will affect any funds you may inherit in the future.
There’s a new act that was recently signed into law by President Trump and which took effect on January 1st, 2020. It’s called the SECURE Act, and it stands for Setting Every Community Up for Retirement Enhancement. There are both good and bad news associated with it, and if you receive an inheritance in the future, you’ll want to know how the SECURE Act will affect you.
One part of the act changes the age at which mandatory distributions from qualified retirement accounts and IRAs must occur. It increases this age from 70 ½ to 72. This is the good news—it gives people a little more time to accumulate money because people are working longer. That makes sense.
The other part of the act has to do with distributing money more quickly once it’s inherited. This is the bad news—the government is now taking more tax on inherited funds.
How does this work? Well, prior to the new act, if you received an inheritance at age 40 from your parents or grandparents, you would only have to take out about 2.5% in the first year, and you would have up to 40 years to deplete it. With that long to take the distribution, which is fully taxable, you’re able to take advantage of more tax deferment. And if you received an inheritance at the age of 60, you’d have to take out about 4% in the first year and would still have 25 years to take the full amount.
Both of those scenarios are better than 10 years, which is how long the new SECURE Act allows. You can take the inherited funds out at any point during those 10 years, but you must take them all by the end of that timeframe. So, for instance, if you’re taking out 10% each year, you’re obviously paying more in taxes than you would have by taking a smaller percentage out under the previous law.
Now, if it’s a small amount of money, say an IRA with $5,000, $10,000, or even $100,000 in it, this new law isn’t going to make that much of a difference to you. However, if it’s a really large IRA, say $1,000,000 or more, then it’s going to make a bigger difference in how quickly the government gets their taxes from you, as well as how much they take.
So, both good news and bad news with the new SECURE Act. To learn more about how this new law may affect you, read this MarketWatch article. Until next time, enjoy.