When planning for your future, you should focus most on the factors you can control. But you still must be mindful of those factors out of your control, one of which is government policy.
Recent passage of the SECURE Act may have many retirement savers taking a second look at their plans. Most of its provisions went into effect on January 1. Although the primary objective of the bill is to increase worker access to retirement plans, several changes affect individuals and the rules for your retirement savings.
So, what does the SECURE Act mean for you?
Here are highlights of the biggest changes for individuals along with answers to some common questions.
Required minimum distribution starting age increased to 72
Previously, the starting age for required minimum distributions (RMDs) from retirement plans and traditional IRAs was 70 ½. Under the new law, RMDs don’t begin until you turn age 72.
I turned 70 ½ in 2019, can I delay my RMDs?
No. The law applies to those who turn 70 ½ in 2020 or later. Those who turned 70 ½ in 2019 still must take their first RMD by April 1, 2020.
Can I still wait until April 1 of the following year in which I turn 72 to take my first RMD?
Yes. The option to wait until April 1 of the following year to take your first RMD remains.
The stretch IRA is eliminated
One of the most notable parts of the new law are changes that effectively eliminate the stretch IRA strategy. This allowed non-spouse beneficiaries to draw down an inherited IRA over their lifetimes. Under the new law, they are required to withdraw all the funds within 10 years of the original account holder’s death.
The shorter window in which beneficiaries must deplete the account could result in unwanted tax bills, if not properly addressed. Therefore, those who stand to inherit an IRA and those who want to hand one down should review their plans and adjust them accordingly.
Are there exemptions to the rule?
Yes. Exemptions are made for spouses, disabled or chronically ill beneficiaries, minor children and those who are not more than 10 years younger than the original account owner.
What if I’ve already inherited an IRA?
You’re in the clear. You can still withdraw distributions over your own life expectancy. The new law applies to beneficiaries of account owners who die in 2020 or later. So, if your benefactor passed away on December 31, 2019, you are not affected.
What alternative strategies are available?
That varies on an individual basis. It will be necessary to reevaluate your designated beneficiaries and overall estate plan. Some individuals may benefit from converting their traditional IRA to a Roth IRA, which can be inherited free of income taxes. However, such a move comes with its own set of tax challenges, which is why it is prudent to work your financial adviser to determine what option is right for you and your beneficiaries.
Elimination of the age 70 ½ restriction on IRA contributions
People who choose to work past age 70 ½ are now allowed to make contributions to a traditional IRA. This is a very positive change as more Americans continue to work longer, and because delaying retirement by even just a few years can make a big difference.
Annuities to be offered in retirement plans
New changes in the law make it easier for employers to offer annuities in their retirement plans. The option of a guaranteed lifetime income investment isn’t inherently bad. But language in the law opens the door for more complex and higher cost annuities to be included. (There is a reason why the insurance industry lobbied hard for this bill.) Retirement plan participants may have difficulty navigating the drawbacks of these products and may find themselves targets of heavy-handed annuity sales pitches.
How do I know if I should buy an annuity in my company plan?
Most retirement savers can do well without purchasing an annuity in their 401(k) or other employer-sponsored plan. Considering the various rules and fees involved, be sure you understand how annuities work and get an objective opinion from a financial adviser before buying one.
Parents can withdraw up to $10,000 without penalty from retirement accounts for the birth or adoption of a child
In the year of the birth or adoption of a child, each parent can take penalty-free early withdrawals (taken before age 59 ½) of up to $5,000 from their retirement accounts. However, income taxes still apply. This can provide some welcome relief, especially for working parents. Still, retirement funds should be used for retirement. (You may repay the funds back to the account later, but the rules surrounding this option are still unclear.)
Can I withdraw the money before the child is born or adopted?
No, even if you plan to use the money for costs related to the child’s birth or adoption.
529 funds can be used to repay student loans
Traditionally, 529 plans were limited to qualified higher education expenses, including tuition, fees and textbooks. A provision of the SECURE Act now allows a lifetime maximum amount of up to $10,000 to be used to repay student loans for the account beneficiary. Further, an additional $10,000 may be used to repay student loans for each of the beneficiary’s siblings.
Can I still deduct student loan interest from my taxes?
If you use money from a 529 plan to pay down student loan interest, you can't deduct that interest as an above-the-line deduction.
The bottom line
If you think any of these changes will directly impact you – and that’s probably many people reading this – don’t wait. Meet with your financial adviser to determine what changes to your plan need to be made and where you can make it even stronger.