How the new law affects your IRA and other planning vehicles
As of the beginning of 2020, the Setting Every Community Up for Retirement Enhancement (SECURE) Act has become law, with the potential to enhance your retirement prospects in a variety of areas. Most significant are the changes to Individual Retirement Accounts (IRAs), which could help many older Americans save even more for retirement. But there are also some retirement benefits that have been lost.
Here are some of the highlights of the new rules, and what you can do to take advantage of them:
Expanding IRA Contributions
The SECURE Act removes the age cap on making a contribution to a traditional IRA, which previously had come into play starting in the year you turn 70 ½. Under the new rules, any individual with earned income can make a contribution to a traditional IRA at any age.
This is a huge step for retirement savers, especially as people are not only working longer but living longer too. The law has also raised the required beginning date for taking required minimum distributions (RMDs) from a traditional IRA from age 70 ½ to 72.
Caveat: The ability to delay RMDs until age 72 applies only if you did not reach age 70 ½ by 2019.
Your move: If you’ve been thinking of working past a traditional retirement age, this removes one obstacle toward doing so.
Covering Childbirth Expenses With IRA Assets
The SECURE Act allows an IRA owner to withdraw up to $5,000 during their lifetime for childbirth or adoption expenses, without incurring penalties for early withdrawal. If the distribution is taken from a qualified plan, it is exempt from the mandatory 20% withholding requirement.
Caveat: The distribution cannot be taken before the child is born or adopted, even if it’s for costs related to an expected birth or adoption. To qualify for the adoption benefits, the adopted child must be under the age of 18 or mentally incapable of self-support.
Your move: There’s a timing issue here: IRA funds tend to build toward the end of a person’s working years, while childbirth or adoption tends to occur earlier in life. The new rules might be most advantageous for an older couple looking to adopt.
More Access to Retirement Plans for Small Business
The SECURE Act allows multiple small businesses to team up to create and share in a single retirement plan, helping to add scale and making administration more affordable. Whether you’re a business owner or the employee of a small business, this feature opens up new possibilities for your retirement planning.
Caveat: Pooling your resources with other employers can be a risky endeavor. The bill sets up ways to protect each business involved in a retirement pool, in the event one of the other employers in the plan falls short.
Your move: Offering a retirement plan is a key benefit for many small businesses. If you know of other outfits the size of your own company, start a conversation around teaming up to offer this key resource.
The “Stretch” IRA Is Gone
After seven years of failed attempts to change these rules, Congress has finally eliminated the stretch-out of an inherited IRA. In the past, non-spouse beneficiaries could opt to take only required minimum distributions, stretching them out over their life expectancy. A 40-year-old inheriting a deceased parent’s IRA, for example, could theoretically end up taking distributions for more than three decades. Now, the new law mandates that most beneficiaries must fully withdraw the balance of an inherited IRA within ten years of the IRA owner’s death.
Caveat: If you inherit an IRA from your spouse, you can either roll over the funds to your own IRA or take required minimum distributions until the deceased would have turned 70 ½.
Your move: Don’t depend on an IRA to provide lifetime support for a child. If you have an heir that you think will need financial support over a period of decades, consider a trust instead.
New 529 Provisions
For families that have taken advantage of 529 plans, there were also some minor changes to the rules around these popular college-saving vehicles. Up to $10,000 in 529 plan assets can now be used to pay down student debt during a 529 plan beneficiary’s lifetime. As much as $10,000 can also be used for any siblings of the plan’s initial beneficiary.
Caveat: If you withdraw leftover money from a 529 account rather than using it for the beneficiary's education, you'll have to pay a 10% federal penalty tax on the earnings.
Your move: If you have the capacity to be a bit generous on the 529 plans, don’t be afraid to do so. The tax savings up front can be significant, and you can repurpose some of that money if the intended beneficiary can’t use all of it.
There are some other provisions in the new law that might make it easier for you to build up your retirement savings. If you have any questions about the best way to take advantage of these new regulations, contact us.
The opinions expressed are for general information; you should consult your outside professionals and advisors for information regarding your individual situation.