On December 20th, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act). The SECURE Act, effective January 1, 2020, is the most impactful retirement legislation in the past decade. We've leaned on our legal and financial technology partners to highlight how these important changes could impact your planning.
Elimination of the "stretch" provision for non-spouse beneficiaries of a retirement account
Under the SECURE Act, non-spouse beneficiaries are required to withdraw the balance of the inherited retirement account within 10 years (there are a few exceptions for the disabled and chronically ill). Previously, beneficiaries could "stretch" the required distributions over their lifetime. The shorter 10-year time frame for taking distributions will likely result in an acceleration of income taxes, possibly pushing beneficiaries into a higher tax bracket, and thus receiving less funds than originally anticipated.
The age for Required Minimum Distributions (RMDs) has been increased to 72
This makes sense as people are living and working longer. It also gets rid of the annoying 70 ½ age cutoff for taking RMDs. The new law only affects investors who turn 70 ½ in or after 2020 (they can wait until 72). Those who turned 70 ½ in 2019 are not impacted.
The age cap for Individual Retirement Account (IRA) contributions has been removed
Prior to the SECURE Act, investors 70 ½ and older were ineligible to make IRA contributions. Effective January 1, 2020, there will no longer be an age restriction on IRA contributions, however, contributors to an IRA must earn an income. This is consistent with other retirement plans i.e. 401k and Roth IRA that currently allow contributions after age 70 ½.
Penalty free IRA withdrawals of $10,000 for child birth or adoption
To help alleviate the costs of having and caring for a new child, the law allows for penalty-free withdrawals of $10,000 in the year of a birth or adoption (previously, one would pay a 10% early withdrawal penalty if under the age of 59 ½).
529 Plans can be used to make student loan payments
Congress is acknowledging the growing burden of student loan debt. The SECURE Act would allow a lifetime maximum withdrawal of $10,000 to pay outstanding student loans. The lifetime cap probably doesn't move the needle for most borrowers, but it's a start in the right direction.
We view the SECURE Act as generally favorable as it addresses a new reality in life expectancy, retirement preparedness (or lack thereof), and burgeoning student loan problem. However, there are some disadvantages, namely the elimination of the stretch provision for non-spouse beneficiaries. If you have a retirement account that will be inherited by a non-spouse, it might be a good idea to explore new tax planning strategies.
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John Shickich, an attorney at Pixton Law Group, contributed to this blog post. You can get in touch with John here.