How it may impact tax-deferred retirement accounts
On December 20, President Trump signed the SECURE Act into law after the bill passed both houses of Congress. The stated purpose of the Act, called the “Setting Every Community Up for Retirement Enhancement Act of 2019,” is to help address the lack of retirement savings for many middle-class Americans.¹ Some studies suggest that well over half of all Americans have far too little savings set aside for retirement or emergencies.
Changes for tax-deferred retirement accounts
Acknowledging that many Americans are retiring later or working part-time in their sunset years, the Act removes the age cap — currently at 70.5 years of age — for contributing to pretax traditional Individual Retirement Accounts (IRAs).² The law also increases the age at which minimum withdrawals from IRAs and 401(k) plans must occur from 70.5 years of age to 72 years of age under a more-simplified withdrawal schedule. This change applies to people who turn 70.5 after December 31, 2019.³
Next, by reducing legal-liability concerns, the Act makes it easier for employer-sponsored 401(k) plans to offer guaranteed income payments, or annuities, which are intended to act as insurance against living beyond one’s retirement assets. The Act also makes it easier for small businesses to join together through a multiple employer plan to offer 401(k) plans and share administrative costs, and expands access to 401(k) plans to long-term part-time employees.4
Other provisions in the Act aim to help families with education and adoption costs. The Act allows parents to withdraw up to $10,000 from a 529 education savings account to pay for student loans. Additionally, parents can withdraw up to $5,000 penalty-free from retirement accounts to help pay for the birth or adoption of a child.5 The bill also changes tax rules that inadvertently boosted tax rates on income received by the surviving children of deceased active-duty military or law enforcement personnel.6
Paying for the changes
To pay for these changes, people who inherit tax-advantaged accounts — aside from accounts inherited by surviving spouses and minor children of the deceased — must withdraw the money and pay taxes on those withdrawals within ten years of inheriting. This eliminates the “stretch IRA” tax planning strategy, which allowed those inheriting tax-advantaged accounts to stretch out withdrawals and taxes due over their lifetime.7 The effective date for this change applies to IRA account holders who pass away after Dec. 31, 2019. Inherited IRAs by non-spouse beneficiaries who have already started distributions under the old stretch IRA rules will continue under the previous rules.
What this means for you
The SECURE Act is the first major legislative change to retirement rules in over a decade. The changes, on the margin, could reduce the advantage of using tax-deferred retirement strategies for relatively wealthier Americans. The Act could also, for some, increase the benefit of converting an IRA into a Roth IRA, or using an IRA for charitable contributions.
If you or a family member have questions about the SECURE Act and how it might affect your retirement or estate plans, please don’t hesitate to contact us.
1 Diane Oakley, Jennifer Erin Brown & Joelle Saad-Lessler, “Retirement in America: Out of Reach for Most Americans?” National Institute on Retirement Security, September 2018.
2 Anne Tergesen, “Congress Passes Sweeping Overhaul of Retirement System,” The Wall Street Journal, December 19, 2019.
4 U.S. House of Representatives Ways and Means Committee, 2019.
5 Note that these withdrawals are penalty free, but not tax free.
7 Tergesen, Ibid.
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