At the very end of December 2019 Congress, with bipartisan support, signed into law the SECURE Act (The Setting Every Community Up for Retirement Enhancement Act of 2019). The SECURE Act represents the most significant changes to retirement policy legislation since the Pension Protection Act of 2006. Many of the changes are effective starting January 1, 2020.
If you own an IRA or a company sponsored retirement plan (401k, 403b, TSP), pay attention because these changes affect you.
There are about 26 changes. This article only addresses some of them.
Required Minimum Distributions (RMD):
Prior to the SECURE Act, Required Minimum Distributions were required to start when an IRA owner turned 70 ½. Effective January 2020, the RMD age has been pushed out to age 72. IRA owners turning 72 have until April 1 of the year following their 72nd birthday to take their first RMD. Annual RMDs are required every year after turning 72.
This rule ONLY applies to IRA owners who turn 70 ½ in 2020 and beyond. If an IRA owner turned 70 ½ in 2019, the old rules still apply and they must begin taking RMDs even though they are not yet 72.
Age Limit for IRA Contributions:
Under the old rules, IRA contributions could not be made after age 70 ½. The SECURE Act has removed all age restrictions for IRA contributions. You can make an IRA contribution at any age as long as you have earned income. This is especially important for those who continue working past age 70 ½ and want to grow their retirement assets.
Contribution limits have not changed. For 2020, you can contribute up to $6,000 to an IRA. If you are age 50 or older, you can contribute up to $7,000.
Distributions to Non-spouse Beneficiaries:
Non-spouse beneficiaries used to have three distribution options if they inherited an IRA:
- Take a lump sum distribution
- Take an equal distribution every year for 5 years
- Stretch the distribution over their lifetime
Because IRAs can be sizeable, it was not uncommon for non-spouse beneficiaries to choose option 3 and stretch the distribution over their lifetime. In addition to providing lifetime income, option 3 was the most effective way to minimize taxes on IRA distributions.
The SECURE Act only provides two distribution options for non-spouse beneficiaries:
- Take a lump sum distribution
- Take distributions by the end of the tenth calendar year following the death of the IRA owner
The beneficiary can choose to spread the distributions over 10 years, take a distribution in some years and not others, or take all the distribution in a single year. The only requirement is that the IRA must be completely distributed by the end of the tenth calendar year.
IRAs were originally designed as a tool for retirement savings. They were not designed as a tool to pass wealth to future generations. Changing the distribution rules re-focuses IRAs on their original intent.
The 10-year distribution rule does not apply to the following types of beneficiaries:
- Surviving spouse of IRA owner
- Disabled or chronically ill individuals
- Individuals who are not more than 10 years younger than the IRA owner
- Minor child of IRA owner who has not reached the age of majority; upon reaching the age of majority, the 10-year distribution rule must be applied.
401(k) Contributions for Part-time Workers:
Under the old laws, employers could exclude employees from contributing to a 401(k) if they did not work at least 1,000 hours in a single year. The SECURE Act makes provisions where the employee MUST be eligible to participate in a 401(k) plan if they are over 21 years old and have:
- Worked at least 1,000 hours in a single year, OR
- Worked at least 500 hours in three consecutive years
Any withdrawal from an IRA or company sponsored retirement plan (401k, 403b, TSP, etc.) taken prior to age 59 ½ will be subject to a 10% early withdrawal penalty. The SECURE Act waives the early withdrawal penalty for the birth or adoption of a child. Each parent can withdraw up to $5,000 with no penalty.
These changes are in effect NOW. Take time to familiarize yourself with them. Understand what the implications are for you and for your retirement plan. Need help sorting through how these changes affect you personally? Give us a call.
Published February 14, 2020
Securities offered through The Strategic Financial Alliance, Inc. (SFA) – Member FINRA, SIPC. Advisory services offered through The Strategic Financial Alliance, Inc. (SFA) and Strategic BluePrint LLC.
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. The SFA does not provide tax or legal advice.