Last December while many of us were preparing to celebrate the holidays, a new tax law was signed that impacted many people’s retirement savings choices. With Tax Day approaching next month, you already may be in touch with your tax and financial advisors about preparing your annual returns. Now may be an optimal time to discuss with them whether the new law affects you.
Many people consider the law and its changes to the retirement industry long overdue. Following is a summary of the new law and four key takeaways that my team and I have discussed with our clients which may be of interest to you.
SECURE Act Now in Place
On Friday, December 20, 2019, the Setting Every Community Up for Retirement (SECURE) Act was signed into law. The legislation made headlines for a couple of reasons. It was the second time in three years that new tax regulation was passed at year-end. Additionally, and perhaps more significantly, the SECURE Act offers Americans a more robust toolkit to save for retirement.
The SECURE Act gives retirees greater flexibility with their retirement accounts, includes changes to multiple retirement plans and tax favored accounts and plans:
- Individual Retirement Accounts (IRAs)
- Defined Contribution Plans (e.g. 401ks)
- Defined Benefit Pension Plans
- 529 College Savings Accounts
While some of the provisions are administrative in nature, others directly impact individual investors. Most of the provisions became effective January 1, 2020.
Change 1 – IRA contributions extended to age 72
Previously, you were not able to contribute to your Individual Retirement Account (IRA) once you turned 70 ½ years old. Now, so long as you have earned income, you can save to your traditional IRA up until age 72. ROTH IRAs contributions continue to have no age-based restrictions. How much can you contribute to your IRA? The annual contribution limit for 2020 is $6,000. If you are 50 years old or older, you can contribute $7,000.
Change 2- Requirement Minimum Distributions (RMDs) start date changed to age 72
A Required Minimum Distribution (RMD) is money you legally must take out of your retirement account. Before the SECURE Act was in place, you had to start collecting your RMD from your IRA by April 1 of the year after you turned 70 ½. The SECURE Act simplifies this age requirement by pushing back the RMD to age 72. This means that if you have not started collecting your RMDs, with the new law you can wait to begin collecting them until you are 72 years old. As a result, you get almost two additional years of tax-free compound growth in your IRA when your retirement account is near its peak.
Change 3 – Stretch IRAs are eliminated
In the past, if someone other than a spouse inherited an IRA, the beneficiary could have taken the RMDs on the inherited IRA over her lifetime. For adult children or grandchildren, the ability to “stretch” the IRA’s RMDs over 30, 40, or even 50 years of tax deferral was a very valuable tax planning tool. Under the new law, non-spouse beneficiaries of an IRA must withdraw all assets out of the inherited IRA within 10 years of the deceased account owner’s death. It is not required that the inherited IRA RMDs be collected annually; conceivably, one could empty the account in the final year. This new rule also applies to 401(k) and other defined-contribution accounts.
Exceptions to the new 10-year rule include assets inherited by:
- Minor children
- Disabled or chronically ill beneficiaries
- Beneficiaries who are less than 10 years younger than the deceased IRA owner or 401(k) participant.
Beneficiaries of an inherited IRA or 401(k) whose original owner passed away before January 1, 2020 are not subject to this new 10-year rule.
Change 4 – 401(k) accounts more focused on retirement
The SECURE Act makes it more difficult for employees to access their 401(k) for any purpose other than retirement. For example, the SECURE Act specifically forbids making 401(k) loans easily available through automatic credit/debit. There are a few ways to make withdrawals under the new law. The SECURE Act does allow you to withdraw $5,000 for the birth or adoption of a child. If married, each spouse can withdraw $5,000.
Note: while the withdrawal will be penalty free, income taxes will be due on the withdrawal.
What else should I know about the SECURE Act?
There are provisions that are applicable to individual investors, business owners, retirement plan sponsors, and participants in employer-provided retirement plans. There is a lot to digest, and not all components of the new legislation may be relevant to you. If you would value an independent view of your retirement plan and/or additional perspective on the SECURE Act and your situation, reach out any time.
Caroline Wetzel is one of Natural Nutmeg’s 2019 and 2018 10Best Winners for Business/Life Coach. Caroline is a Certified Financial PlannerTM (CFP®) and Vice President, Private Wealth Advisor with Procyon Private Wealth Partners, LLC. Procyon Private Wealth Partners, LLC and Procyon Institutional Partners, LLC (collectively “Procyon Partners”) are registered investment advisors with the U.S. Securities and Exchange Commission (“SEC”). This article is provided for informational purposes only and for the intended recipient[s] only. This article may also include opinions and forward-looking statements which may not come to pass. Information is at a point in time and subject to change. Procyon Partners does not provide tax or legal advice.