The biggest changes to retirement planning laws since 2006 are on the way, after the president signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act on December 20. Passed with broad bipartisan support, the SECURE Act is intended to expand retirement savings opportunities for workers.
Key Benefits for Individuals:
- Required minimum distributions from retirement accounts will now begin later (age 72 instead of 70 ½). This means more time for savings to grow tax-free.
- Traditional retirement account contributions may now continue after age 70 ½.
- Workers may withdraw up to $5,000 penalty-free from a retirement account for the birth or adoption of a child.
Key Benefits for Businesses:
- Fewer limitations on the setup of multiemployer 401(k) plans.
- Expanded access to annuities as savings options within 401(k) plans.
- $500 tax credit for small employers that implement automatic enrollment in their retirement plans.
SECURE Act Downside: Elimination of Stretch IRA
All of the positive changes highlighted above come at the expense of the elimination of the stretch IRA, which allowed beneficiaries to stretch distributions from an inherited IRA over the course of their lifetime. This presented a tremendous planning opportunity for IRA owners to name young grandchildren as beneficiaries and watch the funds in that account grow tax-free throughout their lives. Now, under the SECURE Act, beneficiaries of inherited IRAs must withdraw the entire IRA balance within 10 years of the death of the account owner.
A few important notes about the new 10-year rule:
- There are no required distributions in years one through 9. The only requirement is that the account have a zero balance at the end of the 10-year period after the owner’s passing.
- The 10-year rule will not apply to surviving spouses (who will still be able to assume the inherited IRA as his or her own), beneficiaries who are less than 10 years younger than the account owner, chronically ill individuals, disabled individuals or minors. The 10-year requirement for minors will take effect at the age of majority, which is 18 or 21 depending on the state.
- This only applies to IRA inheritances occurring after January 1, 2020. All existing inherited IRAs as of December 31, 2019 are grandfathered.
In light of this change, IRA owners should review their non-spouse beneficiaries. Retirement strategies that hinged on the use of the stretch may no longer make sense, but converting a traditional IRA to a Roth IRA could now be a viable alternative.
Inheritors of IRAs must now consider the tax consequences of the required distributions within 10 years of the account owner’s death. Spreading the distribution out over the decade will likely be more advantageous than a single lump sum distribution in year 10. There may also be opportunities to match distributions with years that have higher losses or deductions.
Retirement Plan Considerations under SECURE Act
Small businesses interested in providing a retirement plan for employees should begin or revisit the conversation. Previously unavailable plans may now be more attractive options. Individuals should revisit their retirement plans in light of the extended age of required minimum distribution and the new ability to contribute to IRAs past age 70.
Employers and individuals should proceed with caution when offering or selecting an annuity product within a 401(k). All annuities are not created equal, nor are they right for every retirement plan. Due diligence is critical to ensure the right fit.
All retirement plans and strategies must be considered within the context of your individual financial goals and circumstances. The team at RKL Wealth Management can help individuals and businesses interpret the SECURE Act’s impact on their retirement savings plans. Contact us today to start the conversation.