In 2020, the Secure Act made sweeping changes to retirement savings, affecting not only how you can save but also how you can distribute these savings.
Right as the Secure Act went into effect, the Cares Act was passed as a response to the Coronavirus. The Cares Act also had provisions which affected retirement savings and distributions and, in a way, overshadowed the larger and more permanent changes of the Secure Act.
The people most affected by the changes in the Secure Act are those who are ages 70 and 71. While those ages are very specific, there are good reasons for it.
The Secure Act also has large implications for those who are planning for retirement but younger than 70 and 71.
It is crucial to understand the changes the Secure Act ushered in and how they affect you in order to make necessary adjustments to your retirement plan, not only to avoid penalties but also to maximize your retirement savings.
What did the Secure Act change for retirees?
Most of the Secure Act went into effect on January 1, 2020. While it made many changes to retirement savings requirements and regulations, there are 2 that really needed to be noted by those preparing to retire.
1. The Secure Act moved the start of RMDs from 70 ½ to 72
RMDs, or Required Minimum Distributions, are the amount you must take out of your IRAs and/or 401ks every year after you reach a certain age. RMDs were put into place due to the tax-deferred nature of these retirement accounts.
The government let you put money in these accounts without paying taxes, but they do not want you to keep the money in there indefinitely, which is why RMDs were established.
The Secure Act changed the age at which RMDs must start. Before the Secure Act, the age RMDs had to begin was 70 ½ . Now, RMDs must start by age 72.
The government is basically allowing you to wait a little longer to start paying your taxes on money in these retirement accounts.
2. The Secure Act allowed IRA contributions after age 70
When the Secure Act extended the age at which RMDs begin, it also opened up the ability to contribute to retirement accounts for longer.
Before the Secure Act, at age 70 ½ you were unable to continue contributing to tax-deferred retirement accounts, such as IRAs and 401ks. Now, you can continue contributing to these accounts through age 72.
This is the reason why retirement savings at age 70 and 71 have been so changed by the Secure Act. You have the opportunity to continue contributing to tax-deferred retirement accounts, which was previously not allowed.
Nowadays, many people are working well into their 70s, and there is a very high possibility that this change in the law will affect your retirement plan.
Where should I put my retirement savings at age 70 and 71?
Just because you can now put money into these accounts at age 70 and 71, it does not mean that you should.
First, all IRAs are not yet required to accept contributions from those over age 70 ½. The IRS is still ruling on all the provisions that were put into place from the Secure Act. You have to make sure your IRA account even allows contributions at these later ages.
Second, for almost all the clients we see, those at 70 and 71, and especially those who are still working, there is a better place to put the money than in these retirement accounts.
The main reason for this is distributions. If you continue to put money into the tax-deferred retirement accounts, you are going to have to distribute this money eventually.
There are 2 places we suggest that clients look into for those in this specific situation.
1. QCD – Qualified Charitable Distribution
QCDs, or Qualified Charitable Distributions, are a non-taxable donation made from an IRA to a charity. Basically, you are making a donation from an IRA instead of just writing a check from your bank account.
QCDs can count for your RMDs and, if done correctly, never show up as income on your tax return. This makes it a great strategy to not only satisfy your RMDs but also to give to a cause that matters to you.
Even though RMDs got pushed back to age 72 with the Secure Act, you can still start making QCDs starting at age 70 ½ . This makes it a great option for people who are 70 and 71.
There are a few rules when making a QCD, including:
- Limit of $100,000 per person, per year
- Charity must be a 501 (c)(3) organization
- QCD must be made directly from an IRA account to the charity
- QCD must be first IRA distribution of the year
You can learn more about the rules of QCDs here. Make sure to consult a financial planning professional before making QCDs in order to avoid any surprise tax bombs.
2. Roth IRAs
Roth IRAs are retirement accounts that are not tax-deferred like traditional IRAs or 401ks. The money put into Roths is post-tax money.
For this reason, Roth IRAs do not have RMDs. You are allowed to leave the money, as well as the growth on the money, in these accounts for as long as you want because the government has already collected the tax.
If you are one of these people who need somewhere to put your retirement savings at age 70 and 71, Roths are a great option.
When you actually start distributing the money from a Roth account, it creates a stream of tax-free income, allowing you the opportunity to create a tax-free retirement.
You can also convert any money you have in a traditional IRA into a Roth. Though you have to pay the taxes when doing a Roth conversion, this is a great strategy for those preparing for retirement and wanting to make sure their IRA and RMDs do not create a tax bomb down the road.
The Roth IRA strategy actually works for people of any age. Even if you are significantly younger than age 70 and 71, it could be really advantageous to look into Roth conversions as well as contributions to make your retirement more tax efficient.
If you make too much money to contribute to a Roth IRA, there is the possibility of a Backdoor Roth (contact Cardinal for more info on this).
The Secure Act changed retirement savings. While it is important to understand how these changes affect you, it is equally as important to have a trusted financial advisor who will keep up with these changes for you, especially if you are close to retirement.
To get started with a distribution plan for your retirement savings, contact Cardinal today!