How The SECURE Act Impacts Your Retirement Savings Account – 2021

If you have money in either an IRA or 401K, you probably already know that eventually, you’ll have to take that money out and pay taxes on it if those accounts are Traditional retirement savings account. But the rules for taking required minimum distributions (RMDs) have always been confusing, mainly because they require you to start tapping your funds based on your half birthday—age 70½. 

In May 2020, the House of Representatives passed a bill that would simplify the rules and give your retirement savings account a little more time to grow tax-deferred. 

What’s New with RMDs 

The SECURE Act (Setting Every Community Up for Retirement Enhancement) would raise the RMD age to 72 and allow people of any age who have earned income to contribute to traditional IRAs. 

Under current law, you can’t contribute to a traditional IRA after age 70½. You can contribute to a Roth at any age, as long as you have earned income from a job, but your adjusted gross income must be less than $122,000 if you’re single or $193,000 if you’re married, filing jointly to make the total contribution in 2022. 

Changes in IRAs 

The proposed change would allow older workers who earn too much to contribute to a Roth to put money in a traditional IRA, which they could convert to a Roth. If that is their only traditional IRA, they would only owe taxes on any earnings when they convert, and the money would grow tax-free after that. 

Starting last year, 2020, individuals are allowed to continue making IRA contributions no matter their age, as long as they have an earned income. The previous rule stated that contributions were prohibited after 70½. 

Inherited IRAs 

Retirees may be less enthused about a provision in the bill that would generally require children and other non-spouse beneficiaries to withdraw money from an inherited IRA within ten years. Now, those beneficiaries can spread withdrawals over their life expectancy and stretch out taxes on the funds (spouses can roll an inherited IRA into their own IRA and delay withdrawals until they take RMDs). 

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