In recent years, and continuing throughout 2019, Congress has been rigidly divided across party lines, unable to pass much in the way of legislation. And with election-year battles on the horizon, it doesn’t appear as though gridlock will be letting up anytime soon. On December 20, 2019, however, as part of a $1.4 trillion spending package, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act – the most sweeping set of changes to retirement legislation in more than a decade. While there are many important provisions in the Act (for both individuals and businesses), the following provides a highlight of key features that may likely impact many individuals:
TRADITIONAL IRA AGE LIMIT
- With longevity rising, more and more Americans are choosing to continue working beyond the traditional retirement age. Starting in 2020, there will no longer be an age limit for contributing to traditional IRAs (as long as there is earned income to fund contributions).
RETIREMENT ACCOUNT RMDs
- For anyone turning age 70½ in 2020 or later, required minimum distributions (RMDs) don’t need to begin until the year in which you turn age 72 (instead of the year in which you reach age 70½). This allows aging workers to save longer and potentially increase retirement savings.
RETIREMENT ACCOUNT DISTRIBUTIONS FOR CHILDBIRTH/ADOPTION
- Starting in 2020, there’s a new exception to the 10% penalty for early distributions from retirement accounts. Distributions (up to $5000) will be penalty-free if made during the one-year period beginning from the date on which your child is born or the date you legally adopt an eligible adoptee. Regular income taxes will still apply to distributions, however, so proceed with caution.
DISTRIBUTION RULES FOR INHERITED RETIREMENT ACCOUNTS
- “Stretch IRA” distribution rules have mostly been eliminated. Specifically, if the owner of a retirement account dies in 2020 or later, the account beneficiary will be required to fully distribute the account within 10 years of the original owner’s death.
- Note, this doesn’t apply to certain eligible beneficiaries such as (1) the surviving spouse of the account owner, (2) a minor child of the account owner, (3) anybody who is disabled or chronically ill, or (4) any designated beneficiary not more than 10 years younger than the account owner.
- While the account must be distributed within 10 years, the distributions do not have to occur evenly over those 10 years and there is no mandated annual RMD.
- This shorter maximum distribution period could result in unanticipated tax bills for beneficiaries who stand to inherit high-value traditional IRAs. Owners of traditional IRAs may, therefore, want to review beneficiary choices and consider whether converting traditional IRA funds to Roth IRAs (which can be inherited income tax-free) may be beneficial. Although Roth conversions are taxable events, investors who spread out a series of conversions over the next several years may benefit from the lower income tax rates set to expire in 2026. Additionally, philanthropic individuals may now have more incentive to leave their traditional IRAs to charity.
- Qualified higher education expenses have been expanded to include fees, books, supplies, or equipment required for apprenticeship programs and up to $10,000 used to repay student loans for the account beneficiary (plus another $10,000 for repayment of student loans for each of the beneficiary’s siblings).
- Note, if a 529 distribution is used for repayment of student loan interest, that same interest cannot be deducted under the student loan interest deduction.
- Defined contribution plans (401k and 403b plans) will now have to start providing a disclosure to participants about how much lifetime income could be generated if the entire account balance were used to purchase a single lifetime annuity or a qualified joint and survivor annuity for the employee and the employee’s surviving spouse. This is intended to serve as an annual “progress report” to show how current savings might translate into a monthly income in retirement.
From new IRA rules to 401(k) provisions and 529 adjustments, the SECURE Act attempts to take a positive step toward addressing some of the growing challenges and concerns associated with our current retirement and savings system. Many features of the Act will have an effect on both individuals and businesses in the years to come. Make sure to consult with your advisor to determine how the SECURE Act may impact your financial plan.
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