Jeran Van Alfen, CFP®
SECURE Act: New Rules for Your Retirement Account
The new decade is starting off with some changes. On December 20th 2019 Congress attached the Setting Every Community Up For Retirement (SECURE) Act to the year-end appropriations bill and the act was signed into law. This legislation may affect your retirement plan and your decisions for withdrawals from your retirement account. Here is a brief summary of the law and what items to be aware of.
New IRA Rules
Required Minimum Distribution Age Change
The SECURE Act changes the age that individuals are required to take minimum distributions from their IRA from 70 ½ to age 72. As a reminder, required minimum distributions apply to IRAs or other qualified retirement plans except Roth IRAs. The government requires individuals to begin withdrawing a minimum amount which is taxable as ordinary income. The new age requirement will apply to anyone who is under 70 ½ as of 2020.
Note: Qualified charitable distributions are still allowed at age 70 ½. They will just no longer apply to a RMD.
Traditional IRA Contributions Beyond Age 70 ½
You can now make IRA contributions after age 70! The old law prohibited individuals from contributing to their traditional IRA past age 70 ½. Under the SECURE ACT, individuals of any age can contribute to and IRA if they have compensation (earned income).
Qualified Birth or Adoption Distribution
There is a new exception to the early withdrawal penalty for IRAs. As a reminder, the IRS assesses a 10% early withdrawal penalty for withdrawing money from your retirement account before age 59 ½. There are a number of exceptions to this penalty and now there is one more. Parents can now take up to $5,000 penalty free (the withdrawal is still taxable) during the one year period starting on date of birth or date of adoption.
The “Stretch” IRA is Gone
The “stretch” provision used to be a powerful planning tool for inherited IRAs. To understand this change, it is important to understand the difference between inheriting an IRA as a spouse or inheriting an IRA as a “non-spouse”. If a married individual passes away and leaves an IRA to a spouse, the beneficiary receive the money as if it is their own IRA. This means that if the beneficiary can continue to let the money grow tax-deferred without taking required minimum distributions as long as they are under the RMD age.
However, if a non-spouse inherits an IRA, required minimum distributions begin immediately. Under previous law, there were several options that would satisfy the RMD requirement, and one of them included “stretching” distributions out over the lifetime of the beneficiary.
An example would be a 90-year old grandmother leaves her IRA to her 20-year old granddaughter. The granddaughter would have had the option to take minimum distributions based on her life expectancy which would have made the distributions very minimal and allowed the money to “stretch “over time.
Under the new law, this option is no longer available (with a few exceptions), and the inherited account must be fully distributed within 10 years. A key item to note is that under this new 10-year rule, there is no required distribution until the 10th year. This means that beneficiaries have the option of deciding how they want to take distributions within the 10-year period.
New Rules for Company Retirement Plans
In addition to the IRA changes above, there are several changes that affect company plans.
Tax Credit for Establishing a Retirement Plan
The new law makes some slight improvements to the tax credit businesses can receive for starting a retirement plan. Small businesses are already eligible to receive a tax credit for up to three years for start up costs related to establishing a retirement plan. The new law introduces a formula which may increase the current credit of $500.
New Additional Tax Credit
The law also introduces a new tax credit of $500 for including auto-enrollment in the company retirement plan. Statistics have shown that plans which auto-enroll employees have greater participation which leads to more employees saving their money.
Encouragement for Including Annuity (Guaranteed Income Products) in Company Plans
The new law includes provisions which will encourage the introduction of annuity products in 401(k) plans. There is always debate about rules regarding these types of products in company plans because of the costs involved, but this could be good news for individuals trying to create a predictable income stream with their 401(k).
What to Do Now:
The first of the year is naturally a great time to review your financial plan. With these changes to legislation, it is a good idea to review any changes that apply to you. Specifically, here are items to consider:
Who are your retirement plan beneficiaries? Make sure to check and update your accounts.
Will these changes help you contribute more to your IRA? Consider how the delay in the RMD may help you or If you have earned income in retirement, will you put savings into your retirement account?