The Secure Act Brings Bevy of Changes

The Holiday season brought a multitude of changes to retirement planning, with President Trump signing the Setting Every Community Up for Retirement Enhancement Act into law in December. Here are some of the most notable ways the Secure Act affects retirement savings so you can start adjusting your retirement strategy. (Unless noted, all changes apply starting in 2020.)

RMD begins at age 72. Required minimum distributions (RMDs) from 401(k) plans and traditional IRAs are a thorn in the side of many retirees. RMDs generally had to begin in the year you turned 70 ½.

The Secure Act pushes that age that triggers RMDs from 70 ½ to 72, which means you can let your retirement funds grow an extra 1 ½ years before tapping into them. That can result in a significant boost to overall retirement savings for many seniors.

The new rules apply to those who turn 70 ½ in 2020 or later. If you turned 70 ½ in 2019, you still must take your first RMD by April 1, 2020, and your second by year-end 2020.

No IRS age cap. With many people working and living longer, having a cap on IRA contributions was a hindrance for older workers. The Secure Act repeals the rule that prohibited contributions to a traditional IRA by taxpayers age 70 ½ and older. Now you can continue to put away money in a traditional IRA if you work into your seventies and beyond.

As before, there are no age-based restrictions on contributions to a Roth IRA. Workers 50 and older can contribute a combined total of $7,000 to a traditional and a Roth IRA for 2020.

‘Stretch’ IRA eliminated. Now for some bad news, which many of our readers feared coming true: The Secure Act eliminates the rules that allow non-spouse IRA beneficiaries to “stretch” required minimum distributions from inherited accounts over their own lifetimes. Instead, all assets from an inherited IRA generally must now be distributed by non-spouse beneficiaries within 10 years of the IRA owner’s death. (The rule applies to inherited assets in 401(k) account or other defined contribution plan, too.)

There are some exceptions to the general rule: Distributions over the life expectancy of a non-spouse beneficiary are allowed if the beneficiary is a minor, disabled, chronically ill or not more than 10 years younger than the deceased IRA owner. For minors, the exception only applies until the child reaches the age of majority. At that point, the 10-year rule kicks in.

If the beneficiary is the IRA owner’s spouse, RMDs are still delayed until the year that the deceased IRA owner would have reached age 72 (age 70 ½ before the new retirement law). And a surviving spouse still has the option to take the money as his or her own.

If you banked on having your heirs stretch the IRAs they were to inherit, it’s time to overhaul your estate plans. Some strategies to consider: doing Roth IRA conversions so your heirs will inherit tax-free income instead of taxable income from a traditional IRA, drawing down your IRA for living expenses and bequeathing other assets to heirs, and using RMDs to buy life insurance with heirs as beneficiaries for the income-tax-free death proceeds. Contact an estate-planning lawyer to redo any trusts you set up that incorporated the stretch strategy.

401(k) for part-time employees. Part-time workers need to save for retirement, too. However, employees who haven’t worked at least 1,000 hours during the year typically aren’t allowed to participate in their employer’s 401(k) plan.

That’s about to change. Starting in 2021, the new law guarantees 401(k) plan eligibility for employees who worked at least 500 hours per year for at least three consecutive years. The part-timer must also be 21 years old by the end of the three-year period. The new rule doesn’t apply to collectively bargained employees.

Source: Kiplinger Retirement Report, February 2020