Congress Changes the Rules for Our Retirement: Five Changes That Might Affect You
Just before Christmas 2019, Congress passed and the President signed a new law that makes some major changes to how we use our retirement accounts. The Setting Every Community Up For Retirement Enhancement (SECURE) Act contains some changes you should know about. The Act made many changes, but we will highlight the four most likely to impact you.
Required Minimum Distributions (RMDs) start later for those born after June 30, 1949.
Until now, RMDs have begun after taxpayers reach age 70 ½. At that age, account owners have to remove a minimal amount from retirement accounts every year. The SECURE Act changes the start date from 70 ½ to age 72. Taxpayers who are not yet age 72 who are already taking RMDs will continue taking withdrawals as usual, because their RMDs started under the old law. However, for those who haven’t yet started taking RMDs, this is a good change.
Contributions to IRA accounts can now be made at any age, if a taxpayer is still working.
In order to contribute to a Traditional or Roth IRA, the taxpayer must have earned income – that is, income from a job – at least equal to the contribution (or be married to someone with earned income). Additionally, taxpayers could not previously contribute to an IRA account in or after the year they turned age 70 ½. The SECURE Act has eliminated the age limit for contributions to Traditional IRAs, though the earned income requirement remains.
Beneficiaries of retirement accounts (IRAs, 401(k)s, etc.) have historically been able to avoid having to distribute (and pay taxes on) all the funds from an account by simply taking a minimal withdrawal each year, allowing the account to continue to grow tax-deferred. The account owner could always take larger distributions in any given year if needed, but the increased amount was always optional. However, for deaths occurring after January 1, 2020, many beneficiaries will be forced to withdraw the entire account balance within 10 years, triggering taxes, whether or not they need the funds. Exceptions to this new 10-year rule are beneficiaries who: is a spouse of the deceased account owner; who are minor children of the deceased account owner; who are less than 10 years younger than the deceased account owner; and who are chronically ill. However, this means that most adult children who inherit IRAs from their parents will need to take withdrawals over 10 years, rather than their lifetime.
Most of us are aware that withdrawal of tax-deferred money from retirement accounts like a 401(k), 403(b) or IRA before age 59 ½ will incur a 10% penalty. There are some exceptions to the penalty (though not the tax), and the SECURE Act added an exception for the birth or adoption of a child. Each parent can withdraw up to $5,000 ($10,000 for a couple) from a retirement plan without paying the 10% penalty. There may some repayment options, but they are not required.
Lifetime withdrawals of up to $10,000 can be made from a Section 529 college savings plan to pay off qualified student loans.
Although this is a lifetime (not annual) limit, it applies per student, and could be useful for those families who have excess funds in 529 plans after college. A withdrawal from a 529 plan account made for this purpose avoids both income taxes and any penalties.
These are some of the most relevant highlights of the SECURE Act. Of course, please reach out to us, your tax preparer, or your estate planning attorney before taking any action. We’d welcome the opportunity to talk about these or other topics with you.