You’ve probably heard of the Setting Every Community Up for Retirement Enhancement Act (SECURE) that went into effect on January 1, 2020. Part of a larger federal spending package, the Act brings about reforms intended to make saving for retirement easier and within reach of more Americans than ever before. SECURE brings a broad range of changes to retirement accounts that you should know about before you do anything else this year.
Because Americans are living—and working—longer, retirement needs have changed considerably over the last 30 years. Finally, updates in the law surrounding retirement accounts have caught up to workers who would prefer to start early and work longer and offer more flexibility in financial and retirement planning.
Updates to Traditional IRA Contributions
No longer is there an age limit on contributions to a traditional IRA. Beginning with the 2020 tax year, as long as you are earning the income, you can continue to contribute money into your IRA, long after age 70½. If you are 70½ in 2019, however, you won’t be able to contribute just yet.
Required Minimum Distribution Changes To 72
Currently, the RMD for traditional IRAs and other employers tax-deferred accounts such as 401(k)s, 403(b)s, and 457s is 70½. As of January 1, 2020, individuals who turn 70½ during or after 2020, born on or after July 1, 1949, can begin withdrawing monies from these accounts at age 72 instead of the current 70½.
If you were born before July 1, 1949, and turn 70½ this year, you’ll have to take your 2019 RMD by April 1, 2020. If you are currently receiving RMDs because you’re over 70½, you’ll also have to continue taking them. The change is only for those born on or after July 1, 1949.
401(k) For Part-Time Employees
Workers who work less than 1,000 hours a year can now participate in a company’s retirement plan. Previously, the law required companies to offer a plan for any interested employee who works more than 1,000 hours in a year. Now, employees who work a minimum of 500 hours in a consecutive 3-year period are eligible to join (they must be 21 or over.) The exception is a plan that is part of collective bargaining.
Borrowing For Adoption/Birth Expenses
If you and your spouse are expecting a baby or planning to adopt one, you can now take a withdrawal-free of penalties of up to $5,000 per parent to use toward related expenses. Both parents could each make $5,000 withdrawals, penalty-free, to apply for the birth or adoption of a child if they have their separate retirement accounts (in their names). You can repay the funds as a rollover contribution, or you’ll be required to pay taxes on it.
Additionally, the IRS allows penalty-free withdrawals to some accounts to pay for the purchase of health insurance after the loss of a job or to cover a costly medical emergency.
529 Help For Student Loans
After a child graduates from college, student loans are frequently a souvenir. However, if you’ve been saving for your child’s (or grandchild’s) education, any monies leftover in the 529 accounts can be used towards paying off those student loans, up to $10,000 over the student’s lifetime.
Monies in 529 can also be used to pay for some apprenticeship programs as well.
401(k) For Small Business
One of the reasons workers at small businesses have difficulty with retirement savings is the lack of a plan. But the plans are usually too expensive for small businesses. However, SECURE encourages small businesses to use tax credits to cover the costs of 401(k) plans so they can offer them to their employees who do not receive executive-level salaries.
Tax credits start at $500 and go up to $5,000 over three years for companies of up to 100 employees. The credits begin after December 31, 2019, and are for SEP, SIMPLE, 401(k), and profit-sharing plans.
Workers who decide to utilize the plans will have a range of investments to choose from when they begin saving for retirement. Providers will have the flexibility to offer annuities and other choices in 401(k)s for small businesses.
Changes For Beneficiaries Of Inherited IRAs
Previously, anyone who inherited an IRA could take many years to make distribution of the account. This meant that the beneficiary could take the withdrawals—and the required tax payments—over their lifetime. As of January 1, 2020, those withdrawals of assets must be taken within ten years of the inheritance.
However, surviving spouses, minor children, beneficiaries who are disabled and/or chronically ill, and beneficiaries who are no more than ten years younger than the owner of the IRA are not subjected to the 10-year rule. If a stretch IRA was something you were considering, speak with an estate planning attorney to reevaluate your retirement strategies to see if this is still a viable option for you.
Get Help With Changes From SECURE
This year’s newest tax and retirement changes can be overwhelming. Do you know how they will affect your retirement and estate plans? If you’re considering making changes to either one, speak to someone who can ensure that your plans are optimal under the new laws.
James C. Provenza is an Illinois estate planning attorney with years of experience helping clients with their estate planning to make sure their wishes are carried out. Call our firm today at (847) 729-3939, or use our online contact form.