Congress passed a spending bill and the “Setting Every Community Up for Retirement Enhancement” Act (SECURE Act), just ahead of the New Year. While this legislation intends to help strengthen retirement security across America, it is important not to overlook the changes to contribution and distribution rules for many popular retirement plans effective as of January 1, 2020.
What are the key actions and considerations?
While those who inherited an IRA before the end of 2019 can continue their current required minimum distribution schedule, beneficiaries inheriting assets in 2020 and beyond will now need to withdraw all assets from inherited retirement accounts within 10 years following the death of the original account holder. Exceptions to the new 10-year distribution requirement include assets left to a surviving spouse, a minor child (until they reach the age of majority), a disabled or chronically ill individual, and beneficiaries who are less than 10 years younger than the decedent.
Eliminating the stretch IRA has the potential to generate about $15.7 billion in tax revenue over the next decade, according to the Congressional Research Service. Because of these changes, account holders should review beneficiary elections and reevaluate their retirement and estate planning strategies, including the use of trusts as beneficiaries.
The law increases the age individuals must begin taking required minimum distributions to 72 from 70 ½. This change applies to retirement account owners who will attain 70½ on or after January 1, 2020. The Act also removes the 70 ½ year age limit for IRA contributions. Now all individuals, regardless of age, can contribute to an IRA as long as they have earned income. Annuities will likely be prevalent investment options in 401k plans, due to new employer liability protection. Some retirement plan administration rules have also been modified.
While much of the legislation targets senior savers, retirees and employers, there are benefits for younger savers. The SECURE Act allows Americans who just had a baby or adopted a child to take a withdrawal of up to $5,000 from their retirement accounts, without the typical 10% penalty. New parents can opt to repay the withdrawal amount, but this is not a loan and does not need to adhere to the strict 401(k) repayment process. Also, the legislation allows for up to $10,000 to be used from 529 accounts for repayments of student loans or apprenticeship programs.
If you have any questions about the SECURE Act, or what it means to you, please do not hesitate to contact your team at Crestwood Advisors.