Sep 11, 2020 4 min read

Today we are going to examine the Secure Act, which took effect on Jan. 1, and the Cares Act, which was enacted in March to help with the pandemic.

The Secure Act was passed almost unanimously, which rarely happens in today’s divided Washington. It got overwhelming support because many Americans have not saved enough for retirement.

While there are a number of sections to the law, one of the more significant provisions is it increased the age to start required minimum distributions from 70½ to 72. This is a provision that hurts no one and will benefit many. You can always take more than required if you need income.

By allowing the extra year and a half, deferred income can grow to be available to a widow or widower. When one spouse dies, income goes down. A pension, if there is one, is often reduced and one set of Social Security benefits will disappear.

One bad element of the Secure Act is it eliminated most non-spousal stretch Individual Retirement Accounts. This was a strategy in which people could leave qualified money to younger generations, who could withdraw the money and pay taxes based on their younger age. This could allow the inheritance to grow substantially.

The Secure Act requires all money to non-spouses to be withdrawn before the end of 10 years. This could mean that successful children are receiving this taxable income during their prime earning years, and could increase their tax bill significantly. This means that tax planning is even more important.

If a parent is in a much lower tax bracket than the beneficiary, it might make sense to do a Roth conversion so taxes are paid at a lower rate. While the 10-year rule also applies to Roth IRAs, beneficiaries may be able to let the balance grow tax-free during this time. The accounts must be liquidated by the end of 10 years, but there is no requirement for RMDs during this time. Check with a tax professional.

We are going to discuss two provisions of the Cares Act that were passed. First, RMDs are not required to be taken in 2020. This was kind of the opposite of trying to pump more money into the economy, but it allowed time for stock market recovery. You are not allowed to do Roth conversion of RMDs, but because they are not necessary this year, you might consider this an extra opportunity.

The other provision is the ability to borrow up to $100,000 from a 401(k). You have to pay this money back within three years. I recommended against this back when the law was passed in the spring. You had to be affected directly by COVID-19 to have this option.

If you pulled the money out after the crash, however, you lost all of the recovery. Also, many people will not pay it back and it will become taxable, and you will not have as good of a retirement as possible.

You need to look at the balance as what does it provide per month when you are retired. If you had $300,000 at age 65, this would produce about $1,000 per month if you use the 4% rule. When you combine this with SS, you have a better idea of what retirement would look like.

This amount, while important, does not look quite as big. This is more how we consider Social Security and pensions.

Make sure your financial plans account for all of the new laws to provide the best possible outcome for your family.

Gary Boatman is a Monessen-based certified financial planner and the author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”

To submit columns on financial planning or investing, email Rick Shrum at rshrum@observer-reporter.com.