While the world has been focused almost exclusively on the COVID-19 pandemic, a new law known as the Secure Act kicked in at the start of 2020. The Secure Act represents some of the most profound changes to retirement planning in recent years.
Known formally as the Setting Every Community up for Retirement Enhancement (SECURE) Act, the law signed by President Trump on December 20 marks the first major retirement-related legislation since 2006. The law is intended to modify how individual retirement accounts (IRAs) and 401(k) plans are administered. Below are what we believe to be the most important highlights.
Required Minimum Distributions
Prior to the Secure Act, required minimum distributions (RMDs) began at age 70.5. That age has been increased to 72. Anyone planning to withdraw money from an IRA, 401(k), 403(b), etc. must begin taking distributions no later than age 72.
The one exception here are those born prior to July 1, 1949. They will still have to begin receiving RMDs right away. Those already receiving RMDs must continue to do so. Only recipients born after July 1, 1949 can defer distributions until age 72.
Stretch Withdrawals Eliminated
Beneficiaries of inherited retirement accounts have traditionally minimized their tax liabilities by taking withdrawals over the entire course of their remaining lifetimes. This practice, known as the 'stretch provision', has been eliminated. All distributions must now be taken by beneficiaries within 10 years.
These beneficiaries are non-spouse family members and any others who inherit the retirement benefits of a deceased loved one. The fact that the stretch provision has been eliminated may cause some people to change the way they contribute to or pass on their retirement accounts. For example, it might be better to invest in a life insurance policy rather than allowing non-spouse beneficiaries to inherit retirement benefits.
The good news is that the change does not apply to retirement benefits that were inherited prior to December 31, 2019. It only applies to those benefits inherited in 2020 and beyond.
Early Account Withdrawals
There are only a limited number of reasons people can withdraw from their retirement accounts early without incurring penalty. The Secure Act adds one more: tapping into a retirement account to cover adoption and birth expenses.
Under the law, parents can now withdraw up to $5,000 from a single account, without penalty, to pay adoption expenses or cover the birth of a child. If parents have two separate retirement accounts in their own names, they can withdraw a total of $10,000 penalty free.
Temporary COVID-19 Changes
In closing, it is worth mentioning a few retirement planning changes implemented in response to the COVID-19 pandemic. There are three in particular:
- Higher Loan Amounts – Recent legislation allows retirement account holders to take up to $50,000 or 50% of their vested balance from a 401(k) or IRA as an emergency loan. That is double the normal amount.
- Hardship Withdrawals – Account holders can now make hardship withdrawals of up to $100,000 without penalty.
- Required Minimum Distributions – Despite changes implemented by the Secure Act, COVID-19 legislation allows RMD recipients to forgo their distributions for 2020.
The Secure Act and emergency COVID-19 legislation change the retirement planning picture for some people. It is important to understand how the legislative initiatives affect your plans. We encourage both employers and employees to take the time to educate themselves.
If you are a BenefitMall customer and have any questions about your company's retirement plan, feel free to contact us at any time. If you are not a BenefitMall customer, what is preventing you from joining our family?