How the SECURE Act Could Impact your Retirement Plan
The bill was signed into law on December 20th. What is in The SECURE Act (Setting Every Community Up for Retirement Enhancement) and how will it affect your retirement plan when the Act takes effect on January 1, 2020? Much of the language in the SECURE Act applies to employer – sponsored retirement plans (encouraging auto-enrollment, allowing multiple employer plans for small businesses, etc.) but today let’s take a look at a few key provisions pertaining to individuals.
Increase to the RMD (Required Minimum Distribution) age
The Act increases the minimum age for RMDs in IRAs and 401(k)s from age 70 ½ to age 72. This change applies to anyone who reaches age 70 ½ on or after January 1, 2020. Age 70 ½ was always a confusing start date, allowing those with birthdays in the second half of the year to wait an extra year. The new age gives savers an extra year and a half to delay withdrawals and the income tax associated with them.
Removes the Restriction of IRA Contributions after age 70 ½
The Act now allows anyone who is still working and has earned income to contribute to a traditional IRA past age 70 ½ starting in 2020. As more Americans are working longer, this change makes a lot of sense.
529 Plan Distributions for Student Loan Payments
The law expands the definition of a tax-free or qualified distribution from a 529 savings plan to include repayment of up to $10,000 in qualified student loans, and expenses for certain apprenticeship programs.
Penalty Free IRA Withdrawals of $10,000 for Birth or Adoption of Child
Most withdrawals from IRAs prior to age 59 ½ incur a 10% penalty in addition to tax owed. The new law allows for penalty free withdrawals of $10,000 in the year of a birth or adoption. While it may not be the best policy to encourage new parents to use their retirement funds for this purpose, it provides relief during a very expensive time of life.
Elimination of Stretch IRA Strategy
Non-spouse beneficiaries of IRA accounts have been allowed to stretch withdrawals from these accounts over their lifetime, a strategy that defers tax owed on withdrawals for decades. The SECURE Act eliminates this option for most beneficiaries and instead requires them to withdraw all funds within 10 years of inheritance if the original IRA or Roth IRA owner passes away on or after January 1, 2020. Exceptions are made for beneficiaries who are spouses, disabled, chronically ill, or are minor children. Ten years is still a long time, but this change may warrant a review of your estate plan. There's no mention of an annual withdrawal, only the fact that all assets must be withdrawn within 10 years from the original account owners date of death.
Bottom Line: Overall, the good outweighs the bad in this bill. The delay in Required Minimum Distributions gives retirees more time to implement other tax strategies between their retirement date and the RMD beginning date. Allowing workers of any age to contribute to an IRA makes sense. The IRA withdrawal exception for birth or adoption gives new parents relief during a very expensive time in life, and 529 plans are the logical place to search for funds to pay off student loans.
Thank you for the continued opportunity to serve you and your family.