Congress has passed significant changes to retirement savings law that will affect individuals in or nearing retirement, new parents, small business owners and employees, and could have a major impact on estate planning. The Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed in December 2019, includes many bi-partisan reforms that increase access to workplace plans and expand retirement savings. Most provisions in the law become effective January 1, 2020. The retirement legislation includes policy changes that will impact defined contribution plans (like 401k’s), defined benefit plans, individual retirement accounts (IRAs) and 529 plans.
Here are some of the most important changes you need to know about:
Change to RMD age: The law raises to 72 from 70½ the age at which individuals must begin taking required minimum distributions (RMDs) from their retirement accounts. Important: The new law only applies to people who turn 70½ after December 31, 2019. If a person turned 70½ in 2019, the law does not apply—that person must take an RMD in 2019, 2020 and beyond. The SECURE Act makes no changes to the date at which individuals may begin to use their IRAs (and inherited IRAs) to make QCDs. Thus, even though an individual turning 70 ½ in 2020 will not have to take an RMD for 2020, they may still use their IRA to make a QCD of up to $100,000 for the year (after actually turning 70 ½ or later). Beginning in the year an individual turns 72, any amounts given to charity via a QCD will reduce the then-necessary RMD as well (while in the prior 1-2 years, it will simply allow the pre-tax IRA to be used for charitable contributions directly on a pre-tax basis).
Contributions to traditional IRAs after age 70½. The law ends the prohibition on contributing to an individual retirement account (IRA) after 70½. Individuals may continue contributing to an IRA at any age, as long as they have earned income.
New rules for inherited retirement accounts: Under current law, inherited retirement accounts (often referred to as “Stretch IRAs”) can distribute those assets over the beneficiary’s lifetime. Under the new law, those assets must be distributed within 10 years. This provision has potentially significant estate planning implications. There are exceptions for spouses, minor children, disabled individuals and people less than 10 years younger than the decedent. The bill does not affect existing inherited accounts. It only applies to accounts that are inherited in 2020 and beyond.
Penalty-free withdrawals for birth/adoption expenses. New parents can withdraw up to $5,000 from an IRA or an employer-sponsored retirement plan to pay for birth and/or adoption expenses, through the first year after the birth or adoption. Taxes still need to be paid on pre-tax contributions, but no penalties apply to the withdrawal.
Part-time workers can participate in a 401(k) plan. Employees must have worked at least 500 hours a year for three consecutive years in order to be eligible.
Change to 529 plans. Assets in these college-savings plans can now be used to repay up to $10,000 in student loans. This can be a huge win for parents and students alike. The SECURE Act makes this change retroactive to distributions made after December 31, 2018.
Provisions to help small businesses. Several provisions in the bill are designed to make it easier for small businesses to offer retirement plans to their employees, including a provision that will allow unrelated small businesses to band together in so-called “multiple employers plans” to offer a plan to employees.
Makes it easier for annuities to be offered in 401(k) plans. The new law lowers barriers to offering annuities in employer-sponsored plans, though plans are not required to do so. We are not so convinced that this a good thing, but that’s for another post.
Not sure how the new law may impact your personal finances? Call us today for a consultation about your financial planning.