By Sarah Ruef-Lindquist, JD, CTFA
Happy New Year! With January 1, 2020 comes a host of changes in how retirement planning will be done in light of the new law affecting retirement plans known as the SECURE Act (Setting Every Community Up for Retirement Enhancement Act of 2019) signed into law in late 2019.
There are many aspects to this law that impact how people save for and draw from their retirement plans. Here are just a few.
70 ½ become 72
One of the most significant changes is that the age when someone must begin taking funds out of a 401(k) or IRA has moved from 70 ½ to 72; For many years, people who turned 70 ½ have to begin withdrawing distributions (Required Minimum Distributions, or “RMDs (and paying related income taxes) by April 1 of the following year or suffer a hefty penalty of 50% of the amount of the distribution; Now, the age is 72.
But be careful: The law doesn’t take effect until January 1, 2020, so those who turned 70.5 years in 2019 still need to withdraw their required minimum distributions as required under the old law. People who are expected to turn 70.5 years old in 2020 will not be required to withdraw RMDs until they are 72.
The end of the non-spousal inherited “Stretch” IRA
Until the SECURE Act, those who inherited IRA accounts from people to whom they were not married were able to “stretch” the payments out of the IRA over their own life expectancy. This allowed the funds to grow tax free longer, and delay the payment of income tax resulting from those distributions.
While spouses who inherit their deceased spouse’s IRA can stretch the distributions over their own life expectancy, the SECURE Act requires most other beneficiaries withdraw all assets of an inherited account within 10 years. There are no annual or other periodic required minimum distributions within those 10 years, but the entire balance must be distributed within 10 years of the death.
A new provision of the SECURE Act will allow penalty-free withdrawals of up to $5,000 from 401(k) accounts to defray the costs of having or adopting a child. This provision will assist mostly younger retirement savers who have a longer runway until they actually will be tapping into their 401(k)’s for retirement income.
We will be hearing more about this new provision of the law affecting retirement plans as we enter 2020 and the new decade. Be sure to check with your financial advisor about how any of this may affect your particular situation.