How the SECURE Act and Cares Act Affect Your IRA

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Changes made in 2019 have affected a lot of people’s retirement accounts and how they work for their beneficiaries. It’s important for anyone with an IRA to know how the Secure Act and Cares Act affect their IRA because the changes are both good and bad.

The SECURE Act and Your IRA

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law on December 20, 2019. Changes under the SECURE Act have both good and bad points, which have many people confused. These changes include:

Repeal on Age Restriction for Contributions

Before the ACT passed, you couldn’t contribute to your traditional IRA after you reached 70 ½. Now, you can continue making contributions after this age, which is beneficial for people that continue working after they reach 70 ½ age.

You will need to have eligible compensation to be able to make these contributions.

New 10% Early Distribution Penalty Exception

Exceptions are now given for adoption expenses along with the birth of a child. If you take distributions before 59 ½, any portion of the distribution that is taxable is subject to a 10% additional tax.

This is a steep penalty, and since most people don’t realize that they’ll suffer a 10% penalty until they do their taxes at the end of the year.

Under the new rules, there is a $5,000 exemption per participant if you want to take money out for qualified adoption or birth expenses. The changes are beneficial for anyone that plans to adopt or have a child and needs to find some way to pay for these expenses.

Death of the Stretch IRA

People save in retirement accounts because of tax deferment. You can allow compound interest to work for your retirement account and grow your money more without paying taxes now.

If you die, your beneficiaries can also leverage this same deferment to a certain extent.

Prior to the SECURE Act

A designated beneficiary could stretch distributions for your life expectancy. For a beneficiary, this was highly desirable because assets would remain in the account and grow year-over-year and only have to pay beneficiary required minimum distributions.

The practice was a great way to build wealth.

With a Roth IRA, the distributions became tax free with a qualified event, such as the death of the owner. For many beneficiaries, this was one of the most devastating changes under the SECURE Act.

The SECURE Act changed it so that the stretch IRAs now requires beneficiaries to drain the account in the first 10 years after the account owner’s death. The rule is in place for most non-spouse beneficiaries.

Distributions are optional from year 1 – 9, but if you don’t drain the account, you must increase it by the end of year 10.

A few exceptions are if the beneficiaries are:

  • Disabled
  • Chronically ill
  • Minor child
  • Spouse of the deceased

Even with a minor child, once the child hits the age of majority, the account is switched to the new 10-year period.

A lot of articles seem to miss on exception, which is if the beneficiary is no more than 10 years younger than the account owner. You’ll be able to take a distribution of the account over your lifetime.

What does this mean for you?

The stretch is available for older beneficiaries, which is a nice perk that is offered to eligible for certain beneficiaries. For any beneficiaries that are listed above, the stretch exists otherwise the SECURE Act does remove the stretch IRA.

Qualified Charitable Distributions (QCD) and Why You May Want to Make Them

QCDs shouldn’t be tied into your required minimum distributions. You can begin QCDs as long as you’re 70 ½ at the age of distribution. The Cares Act allows you to make a QCD without needing to take a required distribution.

A lot of financial managers are excited with changes to the QCD because, under the old rules, if you took a distribution from your retirement account, any pre-taxed amount is included in your income.

The exception is if you make a QCD to an eligible charity.

It’s vital that the charity be eligible because if the distribution is made to the charity, the distribution will be tax-free. You can do this up to $100,000 per person each year. Churches are included in this tax-free distribution treatment.

Note: Under the SECURE Act, you don’t have to start taking out your required minimum distribution (RMD) until you’re 72.

CARES Act and Its Importance to Your IRA, 401(k), etc.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act also has some important changes for your retirement accounts. Under the CARES Act, the RMDs aren’t required for 2020.

Under the CARES Act, if you lost your employment or income, you can take up to $100,000 in distributions from your account in 2020. You won’t need to claim 100% of the distribution on your taxes, but you can spread it across three years instead.

You’ll also not have to take a penalty due to the coronavirus-related distribution.

Qualifying for the distribution requires you to be a qualified individual, which falls into the following categories:

  • Test positive for COVID-19 (you, household member, etc.), or
  • Have your income, or a household member negatively impacted due to the coronavirus

If you took someone into your home this year, you could take this benefit if the person is experiencing hardship because of the pandemic. 

The IRS hasn’t mentioned how they will verify that your claims are true.

The CARES Act isn’t subject to that 10% early distribution penalty mentioned earlier.

Note: Many 401(k) plans don’t allow this distribution. You may be able to treat the distribution as a coronavirus distribution.

RMDs and 2021 Possibilities

A lot of advisers were uncertain of what changes may occur in 2021 as the pandemic lingered and even surged to start 2021. There was lot of speculation that there may be some RMD benefits, but this doesn’t seem to be the case as of April 2021.

It seems that those 72 or older will have to resume their RMDs in 2021, with a few changes to keep in mind:

  • You can postpone your 2021 RMD to April 1, 2022, but you will need to take two RMDs and risk having to pay higher taxes if the distribution puts you into a new tax bracket.
  • It’s expected that new legislation will take place in 2021, so you may want to hold off on your RMD because it’s possible that they could be affected.
  • Life expectancy tables have been updated by the IRS and will affect your RMD. The changes will reduce a 72’s first RMD by 6.57% under the change.

Congress has also signaled some interest in pushing the starting age for an RMD up to 75 years old, but it remains to be seen whether this type of legislation will be approved.

If you’re turning 72 this year, you will have to take your first RMD by April 1, 2022.

Overall, the SECURE and CARES Acts have changed IRA RMDs and have some tax advantages. If you’re confused about the changes, speaking to an adviser can add some clarity and help you make the most out of your retirement accounts.

If you want more information about preparing your finances for the future or retirement, check out our complimentary Master Class, ‘3 Steps to Secure Your Retirement’. 

In this class, we teach you the steps you need to take to secure your dream retirement. Get the complimentary Master Class here.

Continuous Care Retirement Community – Understanding Your Options

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Becoming a member of a continuous care retirement community (CCRC) is something people nearing retirement should be considering. These communities are often called life plan communities because you’re making a decision today for your future living and healthcare needs.

What is a Continuous Care Retirement Community?

A CCRC is a community that you enter when you’re still in good health but getting older. The idea is that you join these communities and effectively secure your spot as your care needs increase.

Perhaps you’re in the community for 10 years, but then your hips or knees continue to get a little worse, and you could use some additional care.

As a member of the community, you would be able to secure one of these care spots as they become available so that you can get the care you need. You’ll have peace of mind that as a resident, you can be confident that your care needs will be met for life.

5 CCRCs Contract Types

1. Extensive

An extensive contract has a higher upfront price, but no matter your care needs, the costs never increase. You’ll be buying into a contract, and you can be confident that your costs will remain the same despite potentially increasing medical concerns and needs.

2. Modified

A modified contract has an entrance fee, which is typically smaller than an extensive contract, but the costs will change as your care needs change. So, if you need a skilled nurse, you will have to pay for the care.

The care may be offered at a discounted rate, or you may receive a certain number of care days for free each year.

The modified contract does have an upfront cost, but you will risk potentially higher medical costs as you age.

3. Fee for service

This contract has an entrance fee, but it’s typically cheaper. This option allows you to secure your CCRC, but you will pay a standard fee for any service that you do need.

4. Equity

An equity share is a very important type of CCRC because you’ll actually purchase the property in which you reside. The equity share differs from a contract because you own the property, which will then become an asset.

5. Rental

As a rental, you’ll rent the home, and care may or may not be provided to you. This option is the most affordable, but you’re also taking a major risk because there may or may not be care available when you need it.

One of the things that is important to understand is that all of these options have risks. If you pay more, you reduce your risk in most cases. High upfront costs allow you to have the comfort in knowing that your risks are rather low.

For most people, they’ll often choose:

  • Modified
  • Fee for service

Rental properties are also rising in popularity, as people are considering their options when retiring.

Wait Lists and Continuous Care Retirement Communities

Every community has a different commitment to join a wait list for a community. The population is getting older and living longer, so the demand for CCRCs is very high. Joining one of these lists will vary from community to community, but it will typically require:

  • Application
  • Deposit

The deposits are often refundable or will go to your costs if you do decide to join a community in the future.

With waitlists being long, it’s important to consider joining one as soon as possible. The waitlist can be years – sometimes 4 to 5 years. It’s worth considering joining a waitlist early, especially when you’re in good health, so that you can secure a spot if you want to join in the future.

Good Health and Qualifying for a CCRC

A continuous care retirement community will often recommend joining when you’re in good health. The term “good health” can be subjective. What usually occurs is that when you’re ready to join a community, you’ll be asked to have an exam to better understand what your health needs are today.

Communities are only able to provide a certain level of care, and they safeguard members by ensuring that their care needs can be met.

As a general rule of thumb, if you can live independently, you’re in good health.

Members may be able to join a community if they need assisted living or skilled nursing. Each community is different, so it’s important to ask the community upfront what options are available for new members.

CCRCs are built to help independent members, those that pay a lot upfront, if they have medical issues. A lot of CCRCs don’t allow people that are not independent to join because the commitment is to the independent individuals that joined the community when they’re healthy.

When Should You Join the Community?

A CCRC is a community that you can join and be amongst like minded people. While a lot of members are over 70, this figure is starting to come down. Many communities have a minimum age of 62.

When it comes to couples, one person may be older than the other, and this can cause some conflicts. There is often a lower age requirement for one spouse, but it’s only a few years, making it difficult for couples to enter into a CCRC.

Some people join waitlists in their 50s in preparation that they’ll have a spot available in the community when they need it.

Understanding Entrance and Monthly Fees

A continuous care retirement community will often have an entrance fee and a monthly fee. The entrance fee is sort of like an insurance that allows you to become a part of the community. This fee will have some potential medical costs rolled into it.

The monthly fee is for all of the additional perks, such as:

  • Meal plan
  • Housekeeping
  • Utilities
  • Amenities
  • Fitness center
  • Classes
  • Transportation 
  • Maintenance, etc.

Monthly fees cover virtually everything with the exception of Internet. The monthly service fee at a CCRC covers everything so that you can relax and not worry about fixing a roof or mowing the lawn.

Specific Situations Within a CCRC

CCRCs have had to adapt with the times. There was a time when everything was standard, and meal plans couldn’t be adapted based on a person’s dietary needs or desires. Today, a lot of these retirement communities are offering made-to-order meals to adhere to the dietary differences of their members.

In addition to food concerns, another concern is how the fee structure may be different for couples when one is healthy, and one has higher care needs.

If a community can serve these individuals, they’ll often work with you. Members are different because if they enter as an independent, these communities understand that one individual may have more needs, while others don’t.

One spouse would move into the assisted living while one remains in independent living.

There are also options where an outside agency may send someone to care for the spouse so that the couple can stay together for longer.

A continuous care retirement community is a great option for anyone that wants to cover their bases as they age and grow older in a community that is more like a resort than a traditional retirement home. If you need additional care in the future, the CCRC can offer you the care you need at a place that you’ve long called home.

If you want more information about preparing your finances for the future or retirement, check out our complimentary Master Class, ‘3 Steps to Secure Your Retirement’. 

 In this class, we teach you the steps you need to take to secure your dream retirement. Get the complimentary Master Class here.