The Setting Every Community Up for Retirement Enhancement — the SECURE Act — was signed into law Dec. 20, 2019. Many provisions took effect Jan. 1, 2020. The SECURE Act retirement planning changes that are most relevant in the near term include:
- A later age for required minimum distributions (RMDs): age 72 from 70 ½ previously.
- A change to the IRA stretch strategy for non-spouse beneficiaries who inherit retirement accounts.
- Elimination of the 70 ½ age limit for workers who contribute to a traditional IRA.
Required minimum distributions
The SECURE Act increases the RMD age to 72 from 70 ½ and applies to anyone who turns 70 ½ in 2020 or later.
If you don’t need income from your retirement plan or IRA accounts, the SECURE Act enables you to defer taxes from those accounts. If you want to work longer, the later RMD age provides more time for retirement-income planning.
- You turned 70 ½ in 2019: The SECURE Act does not change your RMD timing. You must take your first RMD by April 1, 2020.
- You will turn 70 ½ in 2020 or later: Under the SECURE Act, you must take your first RMD by April 1 after the year you reach age 72.
First half 2020 birthday example: Turn 70 in spring 2020 and 70½ in December 2020
New rule – SECURE Act
Under the SECURE Act, this person must take their first RMD by April 1, 2023 — the April 1 following their 72nd birthday in 2022. They receive two extra years because of the bill.
Under the former rules, this person would have had to take their first RMD by April 1, 2021 — the April 1 of the year following their 70 ½ birthday in 2020.
Second half 2020 birthday example: Turn 70 in fall 2020 and 70 ½ in spring 2021
New rule – SECURE Act
Under the SECURE Act, this person must take their first RMD by April 1, 2023 — the April 1 following their 72nd birthday in 2022. They receive one extra year because of the bill.
Under the former rules, this person would have had to take their first RMD by April 1, 2022 — the April 1 of the year following their 70 ½ birthday.
IRA stretch strategy in estate plans
Prior to the Secure Act, beneficiaries who inherited retirement accounts (such as a traditional or Roth IRA) could take the RMDs over their lifetime. The SECURE Act changes that financial strategy for most non-spouse beneficiaries who inherit their retirement account on or after Jan. 1, 2020. As a result:
- Most non-spouse beneficiaries must take the account proceeds (and pay the corresponding taxes) within 10 years of inheriting the account. This can be done with any number of distributions.
- Spouse beneficiaries, non-spouse beneficiaries who are no more than 10 years younger than the IRA owner and non-spouse beneficiaries who are disabled or chronically ill will continue to be able to stretch their IRAs over their lifetime.
- If a minor child inherits the IRA, the 10-year period begins when the beneficiary reaches the age of majority (the age at which a minor child legally becomes an adult, generally between 18 – 21 years old).
- A beneficiary who inherits an individual retirement account before the end of 2019 can still draw down the account over their lifetime. However, if a beneficiary inherits an IRA before the end of 2019 and dies Jan. 1, 2020, or later, that beneficiary’s beneficiary will be subject to the 10-year rule. For example:
- Allen’s son, Joe, inherits Allen’s IRA on Nov. 12, 2015. Joe takes RMDs over Joe’s life expectancy.
- On Feb. 12, 2020, Joe dies. Joe’s spouse, Fran, inherits the remainder of the IRA Joe inherited from Allen. Fran must take out the remainder of the IRA within 10 years.
The SECURE Act eliminates the 70 ½ age limit for contributions to a traditional IRA.
- There is no change for Roth IRAs, which do not have an age limit.
- As always, you must have earned income to contribute to a traditional or Roth IRA. The SECURE Act does not change that requirement.
- Special rules apply to ensure individuals who make contributions after age 70 ½ cannot also receive a qualified charitable distribution (QCD) exclusion for those amounts.
We are here to help you
How could the changes impact you? An Ameriprise advisor can help you understand what the SECURE Act means for you and provide personalized advice to adjust your retirement income plans.
Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.
History shows that when people invest and stay invested, they’re more likely to earn positive returns in the long run. When markets start to fluctuate, it may be tempting to make financial decisions in reaction to changes to your portfolio. But people who base their financial decisions on emotion often end up buying when the market is high and selling when prices are low. These investors ultimately have a harder time reaching their long-term financial goals.
How can you avoid making these common investing mistakes? Consider these investment strategies, which can help you reduce the risks associated with investing and potentially earn more consistent returns over time.
Strategy 1: Asset allocation
Appropriate asset allocation refers to the way you weight the investments in your portfolio to try to meet a specific objective — and it may be the single most important factor in the success of your portfolio.
For instance, if your goal is to pursue growth, and you’re willing to take on market risk to reach that goal, you may decide to place as much as 80% of your assets in stocks and as little as 20% in bonds. Before you decide how you’ll divide the asset classes in your portfolio, make sure you know your investment timeframe and the possible risks and rewards of each asset class.
Risks and rewards of major asset classes
- Can carry a high level of market risk over the short term due to fluctuating markets
- Historically earn higher long-term returns than other asset classes
- Generally outpace inflation better than most other investments over the long term
- Generally have less severe short-term price fluctuations than stocks and therefore offer lower market risk
- Can preserve principal and tend to provide lower long-term returns and have higher inflation risks over time
- Bond prices are likely to fall when interest rates rise (if you sell a bond before it matures, you may get a higher or lower price than you paid, depending on the direction of interest rates)
- Among the most stable of all asset classes in terms of returns, money market instruments carry low market risk (managers of these securities try to keep the per-share price at $1 and distribute returns as dividends)
- Generally don’t have the potential to outpace inflation by a large margin
- Not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency (there’s no guarantee that any fund will maintain a stable $1 share price)
Different asset classes offer varying levels of potential return and market risk. For example, unlike stocks and corporate bonds, government T-bills offer guaranteed principal and interest — although money market funds that invest in them do not. As with any security, past performance doesn’t necessarily indicate future results. And asset allocation does not guarantee a profit.
Strategy 2: Portfolio diversification
Asset allocation and portfolio diversification go hand in hand.
Portfolio diversification is the process of selecting a variety of investments within each asset class to help reduce investment risk. Diversification across asset classes may also help lessen the impact of major market swings on your portfolio.
How portfolio diversification works
If you were to invest in the stock of just one company, you’d be taking on greater risk by relying solely on the performance of that company to grow your investment. This is known as “single-security risk” — the risk that your investment will fluctuate widely in value with the price of one holding.
But if you instead buy stocks in 15 or 20 companies in several different industries, you can reduce the potential for a substantial loss. If the return on one investment is falling, the return on another may be rising, which may help offset the poor performer.
Keep in mind, this doesn’t eliminate risk, and there is no guarantee against investment loss.
Strategy 3: Dollar-cost averaging
Dollar-cost averaging is a disciplined investment strategy that can help smooth out the effects of market fluctuations in your portfolio.
With this approach, you apply a specific dollar amount toward the purchase of stocks, bonds and/or mutual funds on a regular basis. As a result, you purchase more shares when prices are low and fewer shares when prices are high. Over time, the average cost of your shares will usually be lower than the average price of those shares. And because this strategy is systematic, it can help you avoid making emotional investment decisions.
How dollar-cost averaging might work in rising and declining markets
In the illustration below, the cost of the investment ranges between $10 and $25 from January through April. A fixed monthly investment of $100 buys as many as 10 shares when the price is lowest but only four shares when the price is highest. In this example, dollar-cost averaging results in a lower average share price during the period, while the market average price — for someone who bought an equal number of shares each month — is higher.
Dollar-cost averaging at $100 per month
When the price is
When the price is
Your Ameriprise financial advisor can help you feel more confident about your financial future, so discuss these strategies with your advisor to see if they may be right for you.
Asset allocation, diversification and dollar-cost averaging do not assure a profit or protect against loss.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
There are risks associated with fixed income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer-term securities.
Stock investments have an element of risk. High-quality stocks may be appropriate for some investments strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with stocks before investing, as they can lose value.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.
Social Security is often associated with a retirement program, but you can use your benefits for other reasons. If you become disabled, you may use Social Security, or if you lose a family member, you may be eligible for survivor benefits.
Learn more about Social Security benefits for you and your family