The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law just before Christmas and is providing several reforms that will make it easier for many Americans to save for retirement. Most provisions of the SECURE Act went into effect January 1, 2020 and there are significant changes that both investors and employers need to know. This post will focus on how IRA investors will be impacted by the reformed law.
The SECURE Act was designed to help strengthen retirement security for more Americans by helping to increase access to tax-advantaged accounts to help citizens bolster their savings to avoid outliving their assets. Here are five things you need to know about the new IRA rules and what you should consider for next steps:
- In most cases, inherited IRA distributions now have a 10-year distribution cap. The SECURE Act eliminated the lifetime ‘stretch’ provision for non-spouse beneficiaries of an inherited IRA and other retirement accounts. There are exceptions to the 10-year rule for surviving spouses, chronically ill heirs and disabled heirs. If you’re a beneficiary of an inherited IRA or 401(k) and the original owner passed away prior to January 1, 2020, no changes are needed. What you should consider: If you have an IRA that you planned on leaving to beneficiaries in order for them to take advantage of the ‘stretch’ provision, you should meet with your retirement and estate planning advisors to see if you need to change your investment strategies. You may want to rethink how you structure your beneficiary designations in light of the new legislation.
- Required minimum distributions (RMDs) for IRAs are required to start at age 72 instead of 70 ½. This applies to individuals who turn 70 ½ in 2020 and beyond. This will allow for those who are working longer to not be required to withdraw their assets at 70 ½. What you should consider: If you turn 70 ½ in 2020 and had planned on starting to take RMDs, you may want to reach out to your financial advisor to review your strategy and options.
- IRA contributions no longer have the age limit of 70 ½. Under the SECURE Act, you can continue to contribute to your traditional IRA past age 70 ½ as long as you are still working. This brings traditional IRAs in closer alignment with Roth IRAs and 401(k) plans. What you should consider: This change doesn’t apply to the 2019 tax year. It begins for the 2020 tax year and you can make a contribution up to April 15, 2021. Work with your financial advisor to discuss how long you plan to work and when you expect to start withdrawing from your accounts with this new law in mind.
- Parents can withdraw up to $5,000 per parent penalty-free from your IRA or other retirement plan to help with birth or adoption costs. The 10% penalty for early withdrawal of funds will be waived for qualified births or adoptions and can be repaid as a rollover contribution to certain plans and IRAs. What you should consider: Parents who don’t have enough saved to cover these expenses can access their retirement funds penalty free. This approach should be discussed with your financial advisor to see if there are other strategies that you could use as it isn’t a best practice to remove funds from your retirement accounts because of the damage it causes to the compound interest you accumulate.
- As with most legislation, there are other provisions that are applicable to more narrowly defined populations. The SECURE Act is no different. There are provisions for non-deductible IRA contributions that can be made with certain foster care payments, taxable non-tuition fellowship and stipend payments are now treated as compensation for IRA purposes and more.What you should consider: Reach out to trained professionals such as CPAs, financial advisors and estate planning attorneys as you work on your retirement and tax planning to ensure that you are making the best decisions for your financial future based on the new rules within the SECURE Act.
The SECURE Act provides many other provisions not discussed here including the ability to now take tax-free distributions from a 529 plan to pay for eligible expenses related to a beneficiary’s participation in a registered apprenticeship program or to repay certain student loans, the requirement that 401(k) plans cover long-term part-time employees working more than 500 hours and more.
Need help deciphering how this new law will impact your retirement planning? Start here.
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The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.
The views expressed are those of BerganKDV Wealth Management. They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm. Investment advisory services and fee-based planning offered through BerganKDV Wealth Management, an SEC Registered Investment Advisor.