Secure Act Sets Up Sweeping Changes for Retirees
Back in May, we noted that the House had passed a bill that if approved in the Senate would set sweeping changes to many retirees and beneficiaries of IRAs. Well, it looks like Washington was able to agree on something this year as the Secure Act was passed by Congress in a flurry of last-minute deal-making in mid-December. The bill was one of two bills to fund government operations that averted a government shutdown that would have taken place on December 20th. The bill was approved by the House of Representatives on December 17, and the Senate followed suit on December 19. President Donald Trump signed it into law on December 20.
Key provisions in the retirement savings portion of the bill include:
- Change to RMD age: The law raises to 72 from 70½ the age at which individuals must begin taking RMDs from their retirement accounts. Important: The new law only applies to people who turn 70½ after December 31, 2019. If a person turned 70½ in 2019, the law does not apply—that person must take an RMD in 2019, 2020 and beyond.
- Contributions to traditional IRAs after age 70½. The law ends the prohibition on contributing to an individual retirement account (IRA) after 70½. Individuals may continue contributing to an IRA at any age, as long as they have earned income.
- New rules for inherited retirement accounts: Under current law, inherited retirement accounts (often referred to as “Stretch IRAs”) can distribute those assets over the beneficiary’s lifetime. Under the new law, those assets must be distributed within 10 years. This provision has potentially significant estate planning implications. There are exceptions for spouses, minor children, disabled individuals and people less than 10 years younger than the decedent. The bill does not affect existing inherited accounts. It only applies to accounts that are inherited in 2020 and beyond.
- Penalty-free withdrawals for birth/adoption expenses. New parents can withdraw up to $5,000 from an IRA or an employer-sponsored retirement plan to pay for birth and/or adoption expenses, through the first year after the birth or adoption. Taxes still need to be paid on pre-tax contributions, but no penalties apply to the withdrawal.
- Part-time workers can participate in a 401(k) plan. Employees must have worked at least 500 hours a year for three consecutive years in order to be eligible.
- Lifetime income disclosure. The bill requires the Department of Labor to propose rules for a new disclosure to plan participants that will illustrate the participant’s projected monthly income in retirement based on current retirement assets.
- Annuities to be offered in 401(k) plans. The new law lowers barriers to offering annuities in employer-sponsored plans, though plans are not required to do so.
- Change to 529 plans. Assets in these college-savings plans can now be used to repay up to $10,000 in student loans.
- Provisions to help small businesses. Several provisions in the bill are designed to make it easier for small businesses to offer retirement plans to their employees, including a provision that will allow unrelated small businesses to band together in so-called “multiple employers plans” to offer a plan to employees.
Here are three quick takeaways that clients should consider.
Clients who have turned or will turn 70½ before December 31, 2019, should ensure that they have taken their RMD or have plans to do so prior to the deadline of April 1, 2020. If you turn 70½ on or after January 1, 2020, you will not need to begin taking required minimum distributions until 2022.
Investors who have estate plans that include leaving retirement accounts to heirs should consider reviewing those plans with our wealth advisors to determine whether any changes need to be made based on the new law.
Investors over 70½ who have earned income should consider discussing with their advisor whether the new rule permitting ongoing contributions to an IRA makes sense for their situation.
We suggest conversations with your advisor to make sure that you are planning correctly with the new laws.
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