On January 1, 2020, the Setting Every Community up for Retirement Enhancement Act of 2019 (SECURE Act) went into effect putting many changes in place for retirement planning.
1) Age for IRA Required Minimum Distributions Raised
Previously, individuals were required to take distributions in the year that they turned 70.5. With the passage of the SECURE Act, the required withdrawal age is now 72. In the case of an inherited IRA received from a spouse, withdrawals were required when the spouse would have turned 70.5. Under the new law, this has also increased to 72.
2) Age for IRA Contributions Raised
The SECURE Act allows taxpayers to continue contributing to IRAs as long as they are working. Previously, contributions were not allowed after age 70.5.
3) Additional Exceptions for Penalty-Free Withdrawals
Taxpayers under the age of 59.5 may now withdraw $5,000 from their retirement accounts for expenses related to child birth or adoption. Each spouse may withdraw $5,000 within one year of the birth or finalization of adoption. While these distributions will be penalty-free, they will be treated as taxable income.
4) Eligibility to Contribute to IRAs Expanded
Previously, contributions to IRAs couldn’t be more than the individual’s earned income. Therefore, workers and students receiving stipends and payments for graduate, post-doctoral, and foster-care of disabled people were not eligible. With the passage of the SECURE Act, these payments are considered as earnings for the calculation of allowed IRA contributions.
5) Elimination of the Stretch IRA Strategy
Before the SECURE Act, beneficiaries were able to stretch distributions from their inherited IRAs based on their life expectancy. Under the new law, non-spouse beneficiaries must withdraw the entire balance within 10 years. There is no minimum for each year. There are exceptions to the 10-year withdrawal rule. These include people who are not more than 10 years younger than the deceased, as well as the disabled and chronically ill. Minors are also provided with an exception. However, once they reach the age of majority, they become subject to the 10-year rule. If you are a non-spouse beneficiary or have an IRA with a large balance, this change may affect your strategy.
6) Annuities to be Utilized in 401K plans
Prior to the SECURE Act, few employers offered annuities to their employees within 401k plans for fear of legal action. Under the new law, insurance companies will carry the responsibility of providing suitable annuity options and employers will not carry legal liability.
7) Changes to Employer-Sponsored Plans
The SECURE Act will allow more small businesses to join Multiple Employer Plans making them more attractive to employers. The new law will also reduce the threshold for eligibility so that long-term, part-time employees may participate in employer-sponsored plans. The new requirement is one full year with 1,000 hours or three consecutive years of at least 500 hours. In addition to the existing start-up credit, employers will get additional tax credits to help cover the cost of initiating a 401k plan or SIMPLE IRA plan with auto-enrollment.
8) 401K Loan Rules
Participants are still allowed to borrow up to 50% of their 401K balance, but may not borrow more than $50,000. The repayment period may be up to five years and may be longer if the funds are used to buy a home. Under the new law, credit cards and debit cards may not be used for 401k loans.
9) Expanded Qualified Education Expenses for 529 Plans
Under the new law, 529 funds maybe used for student loan payments and apprenticeship programs expenses, not to exceed $10,000.
As always, if you have any questions or would like to have a conversation, please reach out to us or your portfolio manager.
The Cornerstone Team
Disclosure: Cornerstone Advisory, LLC, is registered as an investment adviser with the SEC. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment or strategy will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals, and economic conditions may materially alter the performance of your portfolio.