Retirement plans have gone through major changes over the past 6 months due to the passing of 2 new laws, the SECURE Act and the CARES Act. Here we will take a look at the major impacts these two new laws have on retirement accounts.

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THE SECURE ACT

In July of 2019, the House passed a new bill titled the “Setting Every Community Up for Retirement Enhancement Act,” or SECURE Act. The Senate approved the bill on December 19, 2019, and it was signed into law on December 20 by President Donald Trump.

This sweeping bill offers several adjustments to our current laws surrounding saving and preparing for retirement. The SECURE Act is poised to: provide more part-time workers with the opportunity to participate in an employer-sponsored 401(k) plan, adjust the age caps on traditional IRAs and increase access to tax-advantaged retirement savings accounts. Below we’re outlining the most prominent changes of this new act and how they may affect your own retirement.

Change #1: Reduction of the “Stretch IRA”

With the right estate plan in place, people have had the ability to transfer an IRA account to a beneficiary after their passing. While we’re still able to do so, one major change after the passing of the SECURE Act is affecting our beneficiaries in a big way.

If someone has died before December 31, 2019, the inheritor can choose to take withdrawals from the account over the remaining span of their life expectancy. This offers the beneficiary a chance to minimize their yearly tax obligation by receiving smaller amounts over a longer period of time.

With the recent SECURE Act changes, this concept of a “stretch IRA” (meaning the withdrawals are stretched over a lifetime) is eliminated for some. For those who have died after December 31, 2019, their beneficiaries (with the exception of a spouse) are now required to withdrawal the entirety of the account within 10 years of inheriting the account.1 For most, this means withdrawing larger sums of money during a smaller period of time – leading to a higher yearly tax obligation. Depending on the amount, these withdrawals could even push a beneficiary into a higher tax bracket.

It’s important to note, however, that there is no limitation to how the money is distributed. For example, you could choose to withdrawal the entire amount during year 9, say when you yourself reach retirement. Or, you could evenly withdrawal the amount each year for 10 years. If you find yourself in this position, you may want to work with a trusted financial partner to discuss the most effective withdrawal strategy for you.

Heirs who must spend down an IRA in 10 years still have an attractive option. They can purchase a 10-year immediate-income annuity to evenly spread their tax liability over 10 years. The money in the IRA is converted to a period-certain annuity guaranteed to pay out its full value over 10 years. Even distributions can help reduce the total amount of income tax over 10 years. In contrast, larger distributions in a particular year can put one in a higher tax bracket. It’s a set-and-forget option. Once the 10-year immediate-income annuity is set up, they never have to think about making manual withdrawals again. Also, all investment risk is transferred to the issuing insurance company, and the company guarantees a set payment amount for the 10-year term.

Exceptions to the Change

There are certain individuals who are exempt from this new 10-year rule. The spouse of the deceased, for example, can continue withdrawing from the account over the remainder of their lifetime.

Others who are exempt from this rule include:

– Beneficiaries who are disabled or chronically ill

– Minors (unless it is a grandchild of the deceased)

– Those who are less than 10 years younger than the original account owner (for example, a sibling)

Change #2: Required Minimum Distribution Age

Before the SECURE Act passed, the required minimum distribution age was 70 ½. That means that for anyone who turned 70 ½ in 2019 and before is required to withdraw the minimum amount from their retirement accounts, such as a 401(k) or IRA. With the new law in place, that age has jumped to 72.1 While it doesn’t sound like much of a difference, that 18 months of additional saving and delayed withdrawal can create a significant impact on your retirement account. Plus, this allows retirees to delay the tax obligations of withdrawing this income from their accounts.  

Change #3: Penalty-Free Withdrawals For Qualified Births & Adoptions

Section 113 of the SECURE act introduces a new exception for those who seek early distributions. You may now withdraw from your retirement accounts penalty-free for “Qualified Births or Adoptions.” New parents, whether through birth or adoption, are allowed to withdraw up to $5,000 from their individual retirement accounts. In order to make a penalty-free withdrawal, new parents must do so within one year of the birth or adoption.

Notably, the exception applies on an individual basis. Meaning, if both of a child’s parents have available retirement assets, each can make a Qualified Birth or Adoption Distribution of up to $5,000 for each child born/adopted.

Change #4: Eliminating the Age Limitations on Contributing to IRAs

Previously, individuals were no longer eligible to contribute to their traditional IRA once they reached age 70½. Now, beginning in 2020, individuals of any age will be allowed to contribute to a Traditional IRA. The SECURE act has eliminated the previous age cap, allowing people to continue contributing to their IRA for as long as they continue working.1

This change is great news for seniors and could make a significant impact on their retirement savings, considering that more and more Americans 55 and older are making up a significant portion of the workforce. Today, 23.1 percent of the workforce consists of those 55 and older, compared to just 18.1 percent in 2008. And according to the U.S. Census Bureau, that percentage is projected to continue increasing to 25 percent by 2028.

Change #5: 401(k) Eligibility For Part-Time Workers

Before the SECURE Act, employees were required to work 1,000+ hours for an employer in order to be eligible to participate in a 401(k). Congress has recognized how important it is for all workers to participate in employer-provided retirement plans, and so the SECURE Act includes additional provisions to help employers encourage their employees to increase contributions and to let (some) part-time employees participate when they were previously ineligible to do so.

In order to be eligible, part-time employees will have to have worked 500+ hours per year for an employer (which averages out to 9.6 hours a week) for the past three consecutive years. In addition, the employee must be 21 years of age or older by the end of those three years.

These changes for part-time workers apply to plan years beginning in 2021, but the SECURE Act does not require an employer to start ‘counting’ 500-hour years for the purposes of this new rule until 2021. That means that the earliest an employee would be eligible to participate in a 401(k) plan as a result of this change will be in 2024.

While there are additional changes being proposed in this new act, above are a few of the most impactful ways in which Congress’s SECURE Act could be making a difference in how you save for retirement.

THE CARES ACT

The CARES Act that Congress approved is certainly the biggest aid/relief package we’ve ever seen. But it is most definitely needed to help American workers and companies through this time of crisis. The Relief package totals more than $2 trillion and a large part of it is set for businesses large and small, who have been most affected by the forced shut downs to control this COVID-19 virus.

Impact On Retirement Accounts

For 2020, those that are subject to mandatory minimum distributions from their qualified retirement accounts would be able to keep their funds invested without penalty.

Individuals are allowed in 2020 to take distributions from their qualified retirement accounts, such as 401(k) plans and IRAs, of up to $100,000 without having to pay the 10% penalty on early distributions if the distribution is related to adverse financial consequences as a result of contracting COVID-19, or related factors

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020. This law was created in response to the COVID-19 pandemic, which has had a tremendous impact on the financial and physical health of Americans and businesses across the country. While there are many facets to this new law, one area in particular has presented an interesting opportunity for retirees. We’ll discuss the recent change to required minimum distributions (RMD) and why you may want to consider taking advantage of this opportunity.

What Does the CARES Act Say About RMDs?

In Section 2203 titled, “Temporary Waiver of Required Minimum Distribution Rules for Certain Retirement Plans and Accounts,” those who are typically required to take minimum distributions from their retirement savings accounts will not be required to do so for the remainder of 2020.

Who Will This Impact?

Simply put, this will affect anyone who would normally have to take an RMD in 2020, whether it’s coming from a company 401(k), 403(b) or an IRA.

As a reminder, in December 2019, the SECURE Act was passed – changing the age at which an individual is required to begin taking minimum distributions.

According to the IRS: “If you reached the age of 70½ in 2019 the prior rule applies, and you must take your first RMD by April 1, 2020. If you reach age 70 ½ in 2020 or later you must take your first RMD by April 1 of the year after you reach 72.”

With that being said, however, the CARES Act has put a pause on RMDs – even for those who turned 70 ½ in 2019.

Are Inherited IRAs Included in the CARES Act?

While the language of the CARES Act does not mention Inherited IRAs specifically, it does say RMDs have been put on pause for all retirement accounts. Unless further clarification is presented, it is implied that those who have inherited an IRA are not required to take RMDs in 2020.

Can I Return Money I’ve Already Withdrawn?

No, and yes. This change to RMDs is valid for the entire year of 2020, starting January 1. But the CARES Act did not go into effect until the end of March. If you had already taken your RMD for the year, you can not return it.

However, there is a “loophole” of sorts. If you have taken an RMD within the last 60 days, you do have the option to roll this amount over into an IRA. This option can only be done once in a 12-month period, but it may be beneficial for those who took their RMD just before the law was passed.

This 60-day rollover option is not available to those withdrawing from an inherited account.

Considerations About Skipping RMDs in 2020

The biggest advantage of skipping your RMDs for 2020? A reduced tax bill. Since that money would normally count as income, you’d be on the hook for a higher tax bill come next tax season – if you chose to take your RMDs as usual. But in a time where many are facing critical financial struggles, this is one way in which the government is looking to ease financial stress for retirees.

Another important consideration to note is that RMDs are based on “the account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS’s ‘Uniform Lifetime Table,’” according to the IRS.

In other words, your RMD would be determined based, in part, on the account balance as of December 31, 2019 – a time in which markets were strong and nearing a peak. Since then, we’ve entered a bear market and are experiencing general economic volatility. Waiting to take RMDs until 2021 gives retirees a chance to, hopefully, see their accounts regain some value lost over the past couple of months. Withdrawing now would mean retirees are left paying taxes on value that no longer exists in their accounts.

The CARES Act has presented retirees with a potentially advantageous opportunity. While the option is still on the table to withdraw what you need from your retirement account, you are not required to do so until 2021. If you’re wondering whether or not to take advantage of this ruling, talk to one of our financial advisors today. Together, you can evaluate and readjust your retirement plan in accordance with these changes.

Be sure to check out our Top 10 Retirement Considerations guide

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