The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law on December 20th, 2019, in an effort to expand retirement plan access and boost savings at a time when most Americans are under-prepared for the challenges of retirement.
The law is quite expansive, affecting many areas of the retirement landscape (retirement plan providers, employers, retirees, and future retirees... pretty much everyone). Here are a few highlights of the changes that will impact Retirees and Savers:
- Part-time employees may be allowed to participate in Employer-sponsored 401k plans
- Repeal of the age limit (70 1/2) on contributing to retirement plans
- Age requirement on required minimum distributions (RMDs) from retirement accounts is increased to 72 (previously 70 1/2) [impacting investors who turn 70.5 in 2020 or later. Investors who turned 70.5 in 2019 or prior are not affected]
- Inherited IRAs (or Stretch IRAs) are significantly changing: inheritors who receive an IRA account after January 1, 2020 will have to take out the entire balance within 10 years [distributions previously could be stretched out over the inheritor's lifetime]
There are many questions about how these changes are going to affect average, everyday retirement savers, so let's dive into a few of the more complicated situations. (Disclaimer: we are not tax advisors nor do we give tax advice. For more specific tax information regarding your situation, please contact your tax professional.)
#1: Repeal of the Age Limit on IRA contributions
More seniors are working past age 70, but most have not been able to continue saving on a tax-deferred basis unless they are participating in a company retirement plan (ie. 401k) due to prior tax rules prohibiting contributions past 70. But now, the SECURE act repealed the age limit and working seniors can make tax-deferred contributions into their IRAs up to the annual limit. An important caveat: you must EARN an income in order to make IRA contributions. Passive income (e.g. from RE), Social Security, annuity payments, and IRA distributions typically do not count as earned income.
#2: RMD Age increase to 72
Required minimum distributions (RMDs) from retirement accounts were put in place to force retirees to take withdrawals and pay taxes on funds that have been allowed to grow tax-deferred for the life of the IRA owner (or previous IRA owner, as in the case of Inherited IRAs- more on that below). The logic is simple: the IRS wants its tax revenues, but not necessarily all at once. They required a minimum amount to be taken out based on the remaining life expectancy of the IRA owner. Those withdrawals started at 70.5, but now the age requirement has been pushed to 72.
Not without controversy, however. For those already taking RMDs (or need to take RMDs because they turned 70.5 in 2019) they cannot delay withdrawals until 72. They must continue with the previous requirement.
#3: Elimination (sort of) of the Stretch IRA
Stretch IRAs (also known as Inherited/Beneficiary IRAs) were so named for their ability, upon the death of the IRA owner, to stretch out the RMD payments over the life expectancy of the beneficiary. For instance, if a child inherits an IRA from a deceased parent, the child could take minimum withdrawals each year until the balance ran out. Funds continued to grow on a tax-deferred basis, potentially creating a life-long income stream with a large enough balance. With the new law, such possibilities are no more (sort of)... There will be no RMDs, except that the entire balance needs to be withdrawn within 10 years (with some exceptions to the 10-year rule, like spouses, inheritors no more than 10 years younger than the original IRA owner, inheritors with disabilities, and minor children up to the age of majority).
This change will have major implications for both retirement and estate planning for large IRA account holders. Reviewing your estate plan and beneficiaries annually is a good practice to follow, especially with the new rules in mind.
These changes have taken affect as of January 1, 2020. There will certainly be more questions about the impact of the SECURE Act, and we will cover some of those in future posts.
In the meantime, Happy New Year! We look forward to bringing you important and relevant information in 2020 and beyond!