With a new year comes new changes, especially as it pertains to financial matters; and 2020 is no different. Near the end of December, President Trump signed into law what has become known as the SECURE ACT (Setting Every Community Up for Retirement Enhancement). This act has numerous implications impacting retirement accounts, with a few changes worth discussing as it could impact investors’ financial plans for many years to come. Below, a few notable changes are discussed:
Required Minimum Distributions Delayed to Age 72
Starting in 2020, the Act delays the required age at which one must begin taking retirement distributions from age 70.5 to 72, thus granting additional time to delay distributions if desired. You can still begin taking distributions without penalty at age 59.5. Keeping from the previous rule, upon reaching age 72, individuals are still able to delay taking their first RMD (Required Minimum Distribution) until April 1 of the year after they turn 72. This new rule applies only to individuals who turn 70.5 in 2020 or later.
IRA Contributions No Longer Prohibited by Age
As of 2020, the government has removed the age prohibition to contribute new funds into an IRA. Going forward, if an individual or spouse has earned income, they are able to contribute into an IRA regardless of age.
10-Year Rule Replaces “Stretch IRA” Benefit
One of the more sweeping changes to come from the SECURE Act is the elimination of the “Stretch” IRA. Prior to the new law, a non-spouse beneficiary of an IRA could elect to receive their Required Minimum Distributions over their life expectancy, thus “stretching” the distributions (and taxes owed) over their life span, but not anymore. For 2020 and beyond, non-spousal inherited IRA’s must now be distributed within a 10-year period (with a few exceptions). Simply put, 10 years after inheriting a retirement account, the account must be fully distributed. However, the Act allows for distribution flexibility inside the 10-year period by not setting annual distribution requirements, thus allowing one to wait until the last day of the 10-year period to take the full distribution if they so choose or any combination in between. This flexibility provides opportunities to maximize tax efficiency.
Childbirth and Adoption Exception from 10% Early Distribution Penalty
A new rule has been adopted that allows for up to $5,000 to be distributed penalty free from a retirement account for a “Qualified Birth or Adoption Distribution”. The rule states that the funds must be distributed after the event (birth or adoption) and within a one-year period. The rule applies to each individual, meaning if each parent has a retirement account, they each can take a distribution of up to $5,000. Individuals will be able to pay the funds back into the retirement account through additional contributions later.
The passage of the SECURE Act has brought many changes to the retirement landscape in addition to the topics covered above. Some of the changes include the following:
- Unrelated businesses can partner to create multi-employer 401(k) plans with the plans qualified status protected if one employer’s portion of the plan becomes disqualified.
- Employers may receive new tax credits for starting employer-sponsored retirement plans.
- New tax credits for adoption of auto-enrollment of participants in 401(k) plans and an increase in the automatic maximum contribution limit.
As always, now it a great time to assess your financial situation and review your plan as many will be impacted by the adoption of the SECURE Act. If you have any desire to discuss how the SECURE Act may impact your financial future, your partners at Wealthview Capital are ready to discuss it with you.
Jonathan Waide, CFA®, CRPC®