Rule changes in the Setting Every Community Up for Retirement Enhancement — the SECURE Act — took effect on January 1. There are various ways these rules could impact your retirement plan. Here’s what you should know:
Changes in the timing of contributions and distributionsTwo of the most important changes create the potential to build more savings in a traditional IRA and let you keep your money longer in a tax-advantaged account:
• The SECURE Act eliminates the age limit on making contributions to a traditional IRA. Previously, contributions could not be made after age 70½. Effective this year, there is no age limit on contributions to a traditional IRA.
• The age at which you are first required to take minimum distributions from a traditional IRA or workplace savings plan has been raised from 70½ to 72. This could help your retirement funds last longer and generate tax savings. The rule applies to those reaching age 70½ in 2020 or later. If you reached that milestone in 2019, you are still bound to begin required minimum distributions after reaching 70½ .
Enhancements for workplace plans
The SECURE Act includes enhancements to 401(k) plans:
• Employers receive greater tax incentives to automatically enroll employees into their retirement plan. Automatic enrollment tends to encourage participation in a plan.
• Annuity options can now be offered in more workplace retirement plans. Annuities offer a way to turn retirement savings into a stream of steady income that can continue throughout your life. That tends to replicate the effect of traditional employer pension plans, which are available to fewer workers today.
• Workplace retirement plans are now more accessible to part-time workers. Employers are required to offer participation to those who work either 1,000 hours throughout the year or have three consecutive years with 500 hours of service (employees must be age 21 or older to be eligible).
More flexibility for withdrawalsThere are new provisions that allow penalty-free withdrawals from a traditional IRA or workplace savings plan of up to $5,000 per parent following the birth or adoption of a child. While such an early withdrawal avoids the 10 percent penalty, taxes will still be due on the distribution. It may be best to keep this money targeted specifically to meet your retirement income needs, but the new law gives you more flexibility.
Elimination of ‘stretch’ IRAsPreviously, if you inherited an IRA or 401(k), you could “stretch” your distributions and tax payments out over your single life expectancy. Many people have used “stretch” IRAs and 401(k)s as reliable income sources. Now, for IRAs inherited from original owners who have passed away on or after January 1, 2020, the new law requires many beneficiaries to withdraw assets from an inherited IRA or 401(k) plan within 10 years following the death of the account holder. Spouse beneficiaries, non-spouse beneficiaries who are no more than 10 years younger than the IRA owner and non-spouse beneficiaries who are disabled or chronically ill will continue to be able to stretch their IRAs over their lifetime.
Consult with a professionalWhat do these changes mean for you? Be sure to consult with your financial advisor and tax professional to determine how to best adjust your retirement income plans accordingly.