On December 20th, the SECURE Act – Setting Every Community Up for Retirement Enhancement Act of 2019 – was signed into law. The new legislation, which took effect January 1, 2020, brings significant changes to account holders and beneficiaries of individual retirement accounts (Traditional and Roth IRAs) and employer-sponsored retirement plans.
Most of the provisions in the new law are long over-due and more beneficial to plan participants than the current regulations. However, some elements are more restrictive and will likely impact your estate planning. This article highlights key changes in the new law and identifies important retirement and estate planning considerations.
What are some of the changes?
- Removed maximum age for making traditional IRA contributions: Under the old law, individuals could only contribute to their Traditional IRAs until age 70 ½. Now there is no maximum age limitation, so individuals who are still working can continue to contribute toward retirement – and enjoy additional tax-deferred savings.
- Extended age for taking Required Minimum Distributions (RMD): The previous law required individuals to commence taking distributions from their retirement plan by age 70 ½. Under the new law, the RMD requirement is pushed out to age 72. This allows extra time for individuals to benefit from tax-deferred growth in their retirement accounts.
- Eliminated “stretch” IRA for many beneficiaries: Under prior law, qualified designated beneficiaries who inherited eligible retirement accounts were able to stretch required minimum distributions over their life expectancies. Now, only certain eligible designated beneficiaries (i.e., a surviving spouse, disabled or chronically ill beneficiaries, minor children, and beneficiaries who are not more than ten years younger than the account owner) qualify for the stretch. All other beneficiaries must withdraw the entire account balance within 10 years after the participant’s death or, in the case of minor children, within 10 years after reaching the age of majority. (Note: Despite the fact that minor children are eligible designated beneficiaries, all assets from retirement accounts designated to a minor child must be withdrawn within 10 years after the child reaches the age of majority – this may not be a desirous result for parents who wish to provide sound financial management and asset protection for their young children. Additional planning in this circumstance is more important than ever.)
- Expanded participation in employer retirement plans: Employers can now automatically auto-enroll employees in employer retirement plans and increase their contributions up to 15% (up from 10%) after the first full year of employment. In addition, more part-time workers are eligible for employer-sponsored plans since the guidelines were expanded to include employees who work for the same employer for at least 500 hours per year for three consecutive years (through 2023).
- Removed penalties for early withdrawal from retirement accounts for birth or adoption: Most early withdrawals from retirement accounts (before age 59 ½) continue to be subject to a 10% penalty. However, the SECURE Act expanded the list of exceptions to this rule to include withdrawals for expenses related to the birth or adoption of a child. Under the new law, parents can withdraw up to $5,000 for these expenses penalty-free. If the parents have separate retirement plans, they can each withdraw up to $5,000. The provision also provides the opportunity for the parents to replenish their accounts in the future.
- Expansion of Section 529 Plans: 529 plan account owners may now withdraw up to $10,000 tax-free for payments toward qualified education loans. This is a lifetime limit and applies to the 529 plan beneficiary and each of their siblings separately. In addition, 529 plan accounts can now be used to cover costs associated with certain registered and certified apprenticeships.
What actions should be taken?
The changes set in motion by the SECURE Act require proactive planning. It is important to speak with a qualified professional about these changes and their impact on your financial and retirement situation. Here are a few things to consider:
- If you are turning 70 ½ in 2020 and originally planned on taking an RMD from your traditional retirement plan, you now have the option to defer that distribution until age 72. Take the time to review your financial needs and reconsider your withdrawal plans.
- If you are still working and over age 70 ½ in 2020, consider the benefits of making an IRA contribution.
- If you are working part-time and have been previously unable to participate in your company’s 401(k) plan, check with your human resources department to see if the SECURE Act changed your participation eligibility.
- Review and consider adjustments to your estate plan, including establishing trusts for minor beneficiaries and revising your beneficiary designations based on the new law.
At Henson Efron, our attorneys have extensive knowledge and experience in tax, trusts, and estate planning. We, in collaboration with your financial planner, can help you respond to these changes in a way that continues to align with your intended goals.
If you’d like to know more about how the new requirements affect your plans, please contact one of the attorneys on the Henson Efron Estate Planning Team.
The purpose of this article is only to provide general information and should not be construed as legal advice.