Expanding and preserving your retirement savings—these are the primary goals of the new SECURE (Setting Every Community Up for Retirement Enhancement) Act that President Trump recently signed into law and that took effect on January 1, 2020. While this new law is not as sweeping as the 2018 tax law, there are some changes that have an impact on retirement plan savings and strategies. Several of these items have further guidance from the IRS forthcoming, which will provide clarity to many of this law’s details. In the meantime, a summary of the highlights is below:
- A notable change will apply to the “stretch” provision of inherited IRAs. Previously, a non-spouse beneficiary could take distributions over his/her life expectancy. Going forward, those who inherit a retirement account will have to withdraw the full balance within 10 years. Within the 10-year period, there are no distribution requirements. This rule doesn’t apply if the beneficiary is a surviving spouse, is a minor child (until age of majority), is disabled or chronically ill, or is within 10 years of age of the deceased account holder.
- The required minimum distribution (RMD) age is raised to 72. If you turned 70 ½ in 2019, the previous rules still apply, and you must take an RMD by 4/1/20. However, if you turn 70 ½ in 2020, you don’t have to make a distribution until you turn 72.
- Qualified charitable distributions (QCDs) are still allowed from IRAs, and the minimum age of 70 ½ did not change. Therefore, there is now a window of time in which you can gift from your IRA before RMDs begin.
- IRA owners over age 70 ½ can now contribute to a traditional IRA, assuming you have earned income.
- IRA owners and qualified plan participants can withdraw $5,000 penalty-free to cover the cost of having or adopting a baby.
- 529 plan money can be used to pay off student loans (up to $10,000 lifetime limit) and pay for apprenticeships.
- Mortgage insurance premiums can still be deducted (for years 2018-2020).
- Retirement plan safe harbor changes make it more likely that plan sponsors may include annuities in their retirement plans.
- Long-term, part-time employees are now eligible for 401(k) participation. Three years with at least 500 hours of work is the standard for eligibility. These newly added employees can be excluded from top-heavy testing.
Again, these are just some of the high points of the legislation, and further guidance from the IRS will be needed to clarify details. We will continue to explore planning opportunities that arise out of this legislation. If you have any questions or would like additional information, please contact your advisor.
David Foreman serves as Director of Financial Planning and as a Senior Client Consultant with Warren Averett Asset Management. Click here to learn more about him or to contact him directly.