The SECURE Act is included in the appropriations bill just passed by Congress. Here’s what you need to know about the changes coming to retirement.
Earlier this year, the House of Representatives passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. This month it was unexpectedly included in an appropriations bill passed by the Senate on December 19, 2019 and signed into law the next day.
The SECURE Act brings substantial changes to the retirement system—and could affect your own retirement planning efforts. Here are some of the changes to watch out for.
Right now, those with traditional IRAs have to start taking required minimum distributions (RMDs) by April 1 following the year in which they turned 70 ½. The SECURE Act, recognizing that people live longer, pushes back the age at which you have to start taking RMDs. Starting in 2020, you may begin taking them by April 1 in the year following the year in which you turn 72.
This provision takes effect on January 1, 2020. So, if you’re slated to turn 70 ½ in 2020, you’ll receive a reprieve until age 72. However, if you’re already 70 ½ as of the end of 2019, you’re stuck with the old rules and must take your first RMD no later than April 1, 2020. And if you’re already receiving RMDs (or required to) because you’re over 70 ½, you must still continue to receive your RMDs or face the 50% penalty. To sum it up, anyone born on or before June 30, 1949 will be age 70 ½ by December 31, 2019 and must begin/continue taking RMDs. The new rule does NOT affect you.
If you’re in a 401(k) or other employer qualified plan, you already had an exception to the normal 70 ½ required beginning date for RMDs, but you had to still be working for the company to take advantage of it. If you’re still working for the company with the 401(k) plan, and age 70 ½ or older, you can postpone your RMD until you quit/retire from your employer. This ability to delay RMDs until you actually quit/retire remains the same under the SECURE Act.
So what’s changed? If you’re no longer working for the company that offered you the 401(k), then you can wait until age 72 to take your first RMD. But remember, just like in an IRA if you’re already taking RMDs because you had reached age 70 1/2, then you must continue, no matter your age in 2020. Also if you turn 70 1/2 by December 31, 2019 (and are no longer working), then you’ll have to start RMDs no later than April 1, 2020. Thus, if you were born on or before June 30, 1949, you won’t be able to delay until age 72.
Currently, if you're age 70 1/2 or older, you can't make contributions to a traditional IRA. However, as of January 1, 2020, that restriction is no longer in place. There will no longer be age restrictions on making IRA contributions. So, it’s possible that you could be taking RMDs at some point and still able to put money into your traditional IRA. Whether it’s deductible still will depend upon your modified adjusted gross income. (See IRS Pub 590-A for income limits for deductions.)
How much do you need to save to reach your retirement savings goal? Find out by answering a few questions.
Note that the effective date won’t change your ability for the 2019 tax year. If you’re hoping to make a previous year contribution for 2019 after the first of the new year, and you’re above age 70 ½, that won’t work. The change is only for 2020 contributions and years going forward.
Remember that you can still make 2019 (and 2020) Roth IRA contributions regardless of age as long as your income is below the threshold (for 2019: $137,000 for single taxpayers and $203,000 for married filing jointly). That did not change under the SECURE Act.
The SECURE Act also expands access to certain employer-sponsored retirement plans. Starting with the 2021 plan year, employers are expected to offer retirement benefits to workers who have been with the company for at least three years, and who work 500 hours or more each year. Employers may not have to contribute for these employees, but will be required to allow employees to contribute for themselves. More information will be needed on this aspect of law, so stay tuned for more.
Right now, some employers aren’t required to offer coverage to those who work less than 1,000 hours for the company in a year. This may change the landscape for part-time workers, including older employees who work part-time during retirement.
Many folks save in IRA accounts for themselves but also because at their death they want to leave some of their savings to heirs or beneficiaries. Beneficiaries who receive an inherited IRA are generally able to elect how frequently they receive the money. One option is what is known as a "stretch" IRA, which allows beneficiaries to withdraw money based on life expectancy. With the SECURE Act in place, however, this option goes away for many.
Instead, non-spouse beneficiaries have to draw down the IRA by the end of the 10th year following the plan owner’s death. These beneficiaries can take the money out of the account on any schedule they choose. It just has to be fully depleted by the end of the 10 year time horizon. There are some exceptions, such as for disability and beneficiaries not more than 10 years younger than the original account owner. Also minors won’t see that 10-year clock start until they reach the age of majority.
The elimination of stretch IRAs has the potential to force beneficiaries to take larger distributions from inherited IRAs and might result in higher taxes, depending on the situation. For example, Roth IRA distributions are generally not taxable to beneficiaries, so taking the money out of the Inherited Roth IRA account probably has minimal impact on Roth beneficiaries. Traditional IRA beneficiaries do have to pay taxes on most or all of their payments though.
Right now, many employers don’t include annuity choices in their workplace retirement plans because of some of the legal and fiduciary requirements.
However, the SECURE Act reduces some of the fear of liability, and the result could be more lifetime income products being included in employer-sponsored retirement plans, like 401(k) plans. For those hoping to include these types of products in their retirement planning, the SECURE Act could be helpful.
In addition to the above changes, the SECURE Act also includes other provisions designed to encourage small businesses in offering retirement benefits to employees. These provisions have different effective dates, so do your research before trying to utilize these provisions. Here are some of the other key ways this legislation impacts the retirement landscape:
With the effective date of January 1, 2020 for some of the provisions, some planners and experts have been scrambling to make adjustments. And remember many of these law changes require operational changes, so please be patient and ask questions if you get information in conflict with what you learned about the SECURE Act. When making your own retirement plans, take into account some of the new provisions, including the later date for RMDs, as well as the possibility of continuing to make traditional IRA contributions later in life.
Need help? Visit the TD Ameritrade retirement planning page or schedule a free goal planning session with a Financial Consultant to get a feel for your options and how you might be able to make the most of the changes coming soon by way of the SECURE Act.
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