Retirement Is a Whole New Ballgame Under the SECURE Act
Part of the $1.4 Trillion spending package passed by Congress and signed off by the President, the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act contains several important changes and enhancements to longstanding retirement laws. Here are some of the highlights.
Required Minimum Distributions: Age 72
The Act allows retirees to wait until age 72 to begin taking Required Minimum Distributions (RMDs) from their 401(k) and IRA accounts as long as they have not reached age 70 ½ by December 31, 2019. It’s important to note that if you turn age 70 ½ by then, you are subject to the old rules and cannot defer RMD payments until age 72. Under the old rules you are required to take your first RMD for 2019 by April 1, 2020. The change to age 72 combined with the IRS’ expected changes to how they calculate lifetime distributions will afford retirees the opportunity to take smaller required annual distributions, thereby allowing more growth of retirement savings. The rules for Qualified Charitable distributions are unchanged: If you turn age 70 ½ by December 31, 2019 or age 72 thereafter, you can exclude up to $100,000 of income when your annual IRA distribution is paid directly to a qualified charity.
IRA Contributions Allowed After Age 70 ½
Under the prior law, those who were still working were unable to contribute to a traditional IRA after reaching age 70 ½. Beginning in 2020, The SECURE act allows IRA contributions for as long as you keep working. With this favorable change, there are now no age restrictions on contributions to traditional or Roth IRAs. Just remember Traditional IRA contributions may still be non-deductible if income exceeds $104,000 when covered by a retirement plan or $196,000 when not covered (married filing jointly) in 2019. Roth IRA contributions cannot be made once income hits $206,000 married filing jointly in 2019. Assuming you have no other IRA or SEP assets, making a non-deductible contribution to a traditional IRA and then shortly thereafter converting to a Roth IRA (the “Backdoor” Roth) is still allowable and a very powerful savings tool. Finally, there are no limitations on straight Roth conversions. The maximum total direct contribution you can make to an IRA is $6,000 plus $1,000 catch-up if over age 50 in 2019.
Generally employees working less than 1,000 hours during the year cannot participate in an employer sponsored 401(k) plan. Under the Act, starting in 2021, part-time employees will become eligible to participate in an employer sponsored 401(k) plan after working at least 500 hours per year and completing three consecutive years of service. Part-time employees must be at least 21 years of age by the end of the three-year period.
Elimination of the “Stretch” IRA
Perhaps the most unfavorable provision of the Act is that IRA beneficiaries who were not a spouse of the decedent are no longer able to stretch RMDs from an inherited retirement account over their own lifetime. Instead, beneficiaries must now take the full distribution of the inherited account within 10 years of the death of IRA owner. The only exception to this rule is beneficiaries who are minors, disabled or chronically ill, or those who are not more than 10 years younger than the decedent. This change can be a big disappointment to many estate plans that have young children inheriting IRAs outright or through a Trust assuming a lifetime stretch of the assets. IRA holders may want to consider other strategies, such as periodic Roth conversions that will be tax free to beneficiaries.
10% Penalty Waived for Withdrawals for Birth or Adoption
Beginning in 2020, up to $5,000 can be withdrawn early from retirement accounts following the birth or adoption of a child without incurring the 10% early withdrawal penalty. The withdrawal must be taken within one year of the birth or adoption. The withdrawal will still be subject to Federal and state income taxes.
Compensation for IRA
IRA contributions can only be made to the extent that you have taxable compensation. Fellowships, stipends and similar amounts will be treated as compensation – allowing certain students to contribute to IRAs.
Those who contribute to 529 Plans to fund future education costs can now apply up to $10,000 of those funds to pay off student loan debt. 529 Plan funds can now be used to cover costs of apprenticeships, homeschooling, and private elementary, secondary or religious schools.
Small business retirement plans can get a 50% credit up to $5,000 to offset start-up costs. There is also a $500 credit for small business start-up costs for new 401(k) and Simple IRA plans that include automatic enrollment.
Under the Act, plan administrators will be required to provide annual lifetime income disclosure statements to plan participants. Administrators will also reduce legal risks associated with offerings such as annuities and lifetime income options. These options are now portable to new employers, avoiding charges and fees. Small business employers may benefit from new multi-employer plans beginning in 2021. While 401(k) loans are still allowed, they are now prohibited from being disbursed through a credit-card.
These changes could affect you especially if you are approaching age 70. We are ready and available to assist you, so please contact your advisor to review and plan for them.