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The Setting Every Community Up for Retirement Enhancement Act, better known as the SECURE Act, was signed into law on December 20, 2019. This is one of the most sweeping changes to our retirement system in more than a decade, and the new provisions under the law are permanent. Here are the major changes that you need to know:
Elimination of “Stretch” Provision for Inherited Retirement Accounts
Upon the death of the account owner, individual beneficiaries of an inherited retirement account must take distributions from the account within 10 years. In other words, the entire account balance must be withdrawn by the end of the 10th year following the year of inheritance. Please note this only affects beneficiaries who inherit a retirement account in 2020 and beyond; this does not affect beneficiaries who inherited a retirement account from someone who passed away before January 1, 2020.
The SECURE Act does not have any distribution requirements within those 10 years, so beneficiaries will have some flexibility around the timing of distributions depending on their annual income and tax planning needs. For example, a beneficiary could choose not to take any distributions in years 1-5, instead deferring distributions to years 6-10—this may be tax advantageous if, hypothetically, they’re still working during years 1-5, but retired during years 6-10. [See: Transitioning Into Retirement]
This is a change from the previous rules that allowed beneficiaries to stretch distributions over their lifetime (or, if the beneficiary was a qualifying Trust, then over the oldest Trust beneficiary’s life expectancy).
There are four groups of individual beneficiaries who are exempt from the new 10-year rule and who will be allowed to continue taking stretch distributions:
- Disabled and chronically ill individuals
- Individuals not more than 10 years younger than the account owner
- Minor children of the account owner, but only until they reach the age of majority (this depends on the state you live in, but it’s typically 18 or 21 years old)
If your retirement accounts currently list a Trust as the beneficiary, it is a good idea to work with your attorney to review how your Trust is written in order to make sure there aren’t unfavorable impacts on your heirs. For example, a Trust that only allows Required Minimum Distributions (RMDs) to be disbursed from an inherited IRA to the Trust each year may mean that, under the SECURE Act, all distributions must be specifically made in the 10th year after death (since distributions in years 1-9 are considered voluntary), which can create a significant tax event for beneficiaries. As another example, if a Trust requires that retirement account distributions remain in the Trust, then you’ll be subjecting that money to Trust tax brackets, which reach the highest tax rate much faster than individual tax brackets.
Required Minimum Distributions (RMDs) Will Start at Age 72, not 70½
Starting January 1, 2020, the IRS will require you to start taking distributions from your non-Roth retirement accounts at age 72. This is an increase from the previous Required Minimum Distribution (RMD) age of 70½.
This change will only affect you if you turn 70½ in 2020 or later. If you are currently taking RMDs from your retirement accounts, then you must continue taking RMDs. If you turned 70½ in 2019, you will still need to take your RMD for 2019 no later than April 1, 2020.
The change in RMD age does not impact the age at which you can make a Qualified Charitable Distribution (QCD) from your IRA. QCDs allow taxpayers who are 70½ or older to send their RMD (up to $100,000 per year) directly to a qualified charity of their choice. Any QCDs made prior to age 72 will ultimately reduce your Required Minimum Distribution (RMD), which will in turn reduce your tax liability.
You Can Contribute to Your Traditional IRA After Age 70½
Beginning in the 2020 tax year, the new law will allow you to contribute to your traditional IRA in the year you turn 70½ and beyond, provided you have earned income (ie, you worked during the year). This is meant to allow people who work longer to continue saving for a comfortable retirement, but it also gives you more time to consider doing a Roth conversion.
Unfortunately, if you are over age 70½ now, this change does not affect you.
The new law allows penalty-free withdrawals up to $5,000 from retirement savings plans for expenses following a birth or adoption. Previously, you would be hit with a 10% penalty for taking an early distribution from your retirement account.
Tax Credits for Small Businesses
The new law substantially increases the tax credit for small businesses when they establish a 401k, 403b, SEP IRA, or SIMPLE IRA retirement plan. Additionally, the law creates a new tax credit for small businesses that “auto-enrolls” employees in their retirement plans, which can be claimed starting in the 2020 tax year (or the year the auto-enrollment option is adopted by the retirement plan), as well as the subsequent two years.
Part-Time Workers Can Participate in 401k Plans
If you have worked at least 1,000 hours in one year (roughly 20 hours a week) or at least 500 hours in the past three consecutive years, you will be able to participate in your employer’s 401k plan beginning in 2021—however, if you are qualifying under the 500-hour provision, you may not be eligible to participate until 2024 because the SECURE Act doesn’t require employers to start “counting” the 500 hours until 2021.
Increase in Annuity Options in Retirement Plans
The SECURE Act makes it easier for retirement plans to include lifetime income annuities as an investment option for participants. (This isn’t surprising once you know that the insurance industry heavily lobbied for this change.) It’s noteworthy that the SECURE Act changes the rules so that employers are no longer responsible for assessing an insurer’s financial health, so investors should carefully consider annuity options and their costs.
There are many more provisions in the SECURE Act. Please see your tax advisor or give our Team a call at 703-504-9600 if you have any questions or specific concerns.
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Jessica L. Gibbs, CFP®
Vice President & Partner
Jessica was inspired by a podcast to become a financial planner. At the time, she was working at the Brookings Institution as part of their fundraising team. Even though she enjoyed working with individuals on their philanthropic giving, Jessica decided that wealth management was a better way to build the type of long-term, advice-driven relationships she values. After completing Georgetown University’s Certificate in Financial Planning program....
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