In December 2019, as part of a government spending bill, Congress passed and President Trump signed into law the SECURE Act. The legislation makes sweeping changes to how and when individuals may access their retirement assets and how retirement assets are left, at death, to non-spousal beneficiaries. This Act will affect most individuals currently saving for retirement both during their lifetime and after.
Here are some of the biggest changes that may impact you, effective January 1, 2020:
Distributions to retirees
Age of Required Minimum Distribution (RMD) increases from 70½ to 72.
- All retirees currently receiving RMDs must continue to take them
- Retirees born on or after July 1 who turn 70½ in 2020 or later are no longer obligated to begin RMDs until age 72
- For those who reached age 70 prior to July 1, 2019, this legislation does not change current or future distributions
Note: Qualified Charitable Distributions were not impacted. Under the new law, individuals can still begin distributions to a qualified charity at age 70½, even if they will not take RMDs until age 72.
New RMD tables. Beginning in 2021, RMDs will be calculated using new life expectancy factors. The new factors will reflect increases in life expectancy, thus lowering the amount retirees are required to take from their qualified accounts. In 2020, RMD calculations will continue using the existing factors.
Inherited retirement accounts
Elimination of “Stretch IRA.” Upon the death of an IRA owner or 401(k) participant, if the beneficiary is not the surviving spouse, a 10-year clock begins. The funds must be withdrawn by the non-spouse beneficiary by the end of that 10-year period; additionally, withdrawals are taxable. Within the 10-year time frame, no annual distribution amounts are defined in the legislation. The only thing defined is that the funds must be paid out by the 10th anniversary of the original account owner’s death.
There are exceptions to the 10-year rule for “designated beneficiaries.” These include spousal beneficiaries (see above); someone who is disabled or chronically ill; individuals who are less than 10 years younger than the decedent; and minor children of the original account owner — but only until they reach the age of majority (age 19 in the state of Nebraska).
Age limit for traditional IRA contributions lifted
The legislation repeals the prohibition on contributions to a traditional IRA by an individual who has attained age 70½ and allows anyone with earned income to make annual contributions to a traditional IRA, up to the current limits, regardless of age. Qualified Charitable Distributions and deductible IRA contributions made in the same year will offset each other.
Exception to the 10% early withdrawal penalty for childbirth and adoption
The legislation provides for penalty-free withdrawals from retirement accounts for qualified birth or adoption distributions. Up to $5,000 can be withdrawn penalty-free from an IRA or other retirement account to help pay for costs associated with childbirth or adoption. If both parents have a retirement account, each can withdraw up to the limit per birth or adoption. These withdrawals must be made after the qualifying event. These funds can be paid back into the retirement account without counting against other contribution limits.
The SECURE Act addresses a number of other retirement related topics. The following articles provide a more thorough description of the changes:
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