The $1.4 trillion spending package enacted on December 20, 2019 included the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which had overwhelmingly passed the House of Representatives in the spring of 2019, but then subsequently stalled in the Senate. The SECURE Act represents the most sweeping set of changes to retirement legislation in more than a decade.
While many of the provisions offer enhanced opportunities for individuals and small business owners, there is one notable drawback for investors with significant assets in traditional IRAs and retirement plans. These individuals will likely want to revisit their estate-planning strategies to prevent their heirs from potentially facing unexpectedly high tax bills.
All provisions take effect on or after January 1, 2020, unless otherwise noted. We are currently making changes to our systems and internal processes to accommodate the new rules. The following are several major changes created by the new law that may impact you.
Required Minimum Distributions Will Start at Age 72, not 70 ½
Starting January 1, 2020, individuals will need to begin withdrawing required minimum distributions (RMDs) from their retirement plans and their traditional IRAs at age 72, a change from the previous withdrawal requirement of age 70 ½.
If an individual turned 70 ½ in 2019, they will still need to take their RMD for 2019 no later than April 1, 2020. People over the age of 70 ½ currently (or who should be) taking RMDs must continue making withdrawals. Only those who will turn 70 ½ in 2020 or later may wait until age 72 to begin taking required distributions.
Note, an individual can still make a qualified charitable distribution (QCD) from an IRA beginning at age 70 ½, but not as an RMD.
Repeal of Maximum Age for Traditional IRA Contributions
Beginning in the 2020 tax year, the SECURE Act will allow individuals to contribute to traditional IRAs the year they turn 70 ½ and after, provided they have earned income. They still may not make traditional IRA contributions for 2019 if they were over 70 ½.
Inherited Retirement Accounts for Beneficiaries
The legislation modifies the RMD rules with respect to defined contribution and IRA balances upon the death of the account owner. Distributions to individual beneficiaries must be made within 10 years. There are exceptions for spouses, disabled individuals, and individuals who are
not more than 10 years younger than the account owner. Minor children who are beneficiaries of IRA accounts also have a special exception to the 10-year rule, but only until they reach the age of majority.
Penalty-Free Withdrawals for Adoption / Birth Expenses
The new law allows for penalty-free withdrawals from retirement plans for birth or adoption expenses, up to certain limits.
There are many more aspects and provisions to the new law such as keeping the Medical Expense Deduction Threshold at 7.5% of your adjusted gross income. If you have any questions about your accounts, please feel free to contact us.