With the clock ticking down on 2019, Congress enacted a $1.4 trillion year-end spending bill to keep the government running. Tucked away inside this mammoth piece of legislation is the unfortunately named Setting Every Community Up for Retirement Enhancement (SECURE) Act, which includes significant changes to retirement accounts. Some of the more significant changes are:
Age Limit Eliminated for Traditional IRA Contributions
Beginning in 2020, the SECURE Act eliminates the age limit for traditional IRA contributions. Under prior law, you could not make contributions to a TRADITIONAL IRA once you turned age 70½. Now, those who are still working can continue to contribute to a traditional IRA, regardless of their age. This obviously generates some planning opportunities for those still working.
RMD Age Raised to 72
For those who turn 70½ after December 31, 2019 the Act raises the age for beginning required minimum distributions (RMDs) to 72 for all retirement accounts subject to RMDs. Individuals who reach age 70½ in the first half of 2020 will now have until 2021 before withdrawals are required. If that milestone comes in the second half of this year, then the required beginning date is pushed out to 2020.
If all of this is not confusing enough, the qualified charitable distribution (QCD) age does not change, so QCDs can still be done at any point after age 70½, even though RMDs will not be required until age 72.
New Exception to the 10% Penalty for Birth or Adoption
With limited exceptions, retirement plan and IRA distributions before age 59½ are subject to regular income tax plus a 10% penalty. The SECURE Act adds a new exception to the penalty. Individuals are now allowed to withdraw up to $5,000, without penalty, from their retirement accounts within one year of the birth or finalization of the adoption of a child. This penalty-free withdrawal is not available in the case of an individual adopting his or her spouse’s child. The birth or adoption distribution amount can be repaid at any future time (re-contributed back to any retirement account).
Goodbye Stretch IRA
Under prior law, non-spousal beneficiaries could s-t-r e-t-c-h out withdrawals from an inherited IRA over their life expectancy. The obvious benefit of the stretch is that it allowed the inheritance to continue to grow tax-deferred for a long time. The SECURE Act essentially killed the stretch IRA.
Beginning for deaths after December 31, 2019, the rules that allowed the stretch IRA are replaced with a 10-year rule for the vast majority of beneficiaries. This rule will require inherited IRA accounts to be emptied by the end of the 10th year following the year of death. There will be no annual RMDs. Instead, the only RMD on an inherited IRA would be the balance of the account at the end of 10 years after death of the original account holder. For deaths before or in 2019, the old rules remain in effect. There are five classes of “eligible designated beneficiaries” who are exempt from the 10-year post-death payout rule and can still stretch RMDs over their life expectancy.
- surviving spouses
- minor children
- disabled individuals
- the chronically ill
- beneficiaries not more than ten years younger than the IRA owner
Individuals with the biggest IRAs will feel the most impact because a good chunk of these balances will be left to beneficiaries who may be at or near their peak earning years and will now have to pay a substantial tax on unneeded IRA distributions.
Also, folks who have named trusts as their IRA beneficiary should review their trust provisions with their estate planning attorney to see if changes need to be made to the trust language.
Long-Term Part-time Employees Eligibility
New rules have expanded access to 401(k) plans by requiring employers to allow part-time employees who have worked at least 500 hours in each of the previous 3 calendar years and attained the age of 21 to be allowed to participate in the company’s 401(k) plan. This will assist individuals who might otherwise not be saving for retirement to have access to a savings vehicle, potentially including a company match. Unfortunately, this change does not take effect until 2021.
More Types of Income Eligible for IRA Contribution
In an effort to allow more people to save for retirement, the SECURE Act now allows IRA contributions based on taxable non-tuition fellowship and stipend payments as well as any non-taxable difficulty-of-care payments received by foster care providers, in addition to traditional employment income.
Section 529 Provisions
Two provisions of the SECURE Act related to Section 529 plans are also noteworthy. The first allows for the tax-free distribution of up to $10,000 from an individual’s 529 plan to the account’s designated beneficiary, or his or her sibling(s), to pay principal or interest on qualified education loans. Under this provision, the $10,000 limit is per recipient, regardless of the number of 529 plans utilized, and is only available if the recipient has qualified education loans.
Another provision allows for Section 529 plan assets to be utilized to pay qualified expenses related to registered apprenticeships, a category not previously included.
Whether the SECURE Act will help you and your family be more financially secure will depend on your individual circumstances. Unfortunately, for most of you, it will have the opposite effect. As with any change in the tax law, this is an opportune time to review your planning and make sure that your current plan reflects your wishes and will meet your financial planning and wealth transfer goals. Please let us know if you have any questions about this new law.