Congress is at it again, tinkering with the laws related to retirement plans. None of these changes will impact your 2019 taxes or retirement plan choices, But be ready to take advantage of the key changes that will become law in 2020.
The SECURE Act stands for “Setting Every Community Up for Retirement Enhancement” and brings these key changes:
Small businesses will be given tax credits to offset the expense of setting up automatic enrollment in retirement plans for its workers. These businesses will also now have the option to join multiple employer plans, spreading out the cost of managing the plan. This is great news as many small businesses simply fail to offer retirement plans for their employees. And without such a plan in place, employees must fend for themselves, using IRAs as retirement plans, that only allow for $6,000-$7,000 per year to be set aside. Employees with access to 401(k)s and 403(b)s can set aside $19,000 or more per year. An estimated 30% of private-sector employees work for employers that don’t currently offer a way to save for the future.
Another benefit: Part-time workers that work at least 500 hours per year (for three consecutive years) are eligible to participate in a workplace retirement plan. That’s down from a 1,000 annual minimum before. (That rule won’t kick in until 2024).
The law also increases the age you must take Require Minimum Distributions (from 70 ½ to 72). For investors that plan to pursue a Roth IRA conversion strategy, that extra time surely helps. The bill also eliminates the maximum age cap for contributions to traditional individual retirement accounts.
But some of the new rules are ill-conceived. For example, 401(k) and other similar employer-sponsored plans will soon provide an option to invest in an annuity. This should prove to be a massive windfall for annuity salespeople.
And once people own an annuity, it can be awfully hard to change your mind and pursue another investment. Annuities may make sense for some people, but it’s a decision best made only upon retirement. That way, investors can choose from a growing array of low-fee or no-fee annuities, a deal that surely won’t exist within 401(k) plans.
Getting Rid of the Stretch
Stretch IRAs have been a great tool, enabling heirs to spread out the Required Minimum Distributions (RMDs) over the course of their own life spans (subject to some age tests). The SECURE Act requires beneficiaries withdraw all assets of an inherited account within 10 years. There are no required minimum distributions within those 10 years, but the entire balance must be distributed after the 10th year. That’s bound to cause tax headaches for any IRA heirs that are still in their peak working years. (Spouses and minor children are exempted from the 10-year rule).
That 10-year rule also applies to inherited Roth IRAs. Since those accounts present no tax bill when liquidated, it’s likely wise to let that account keep growing and only cash it as you approach the 10-year mark of the inheritance.
One thing’s for sure. Investors that are especially concerned about leaving as sizable an estate as possible to their heirs, with the fewest tax headaches, will increasingly favor funding a life insurance policy rather than an IRA.
If you have funds invested in a 529 education savings plan, there are some changes here too. Parents will now be able to take tax-free withdrawals of as much as $10,000 for repayments of some student loans. That’s a big help for anyone that overfunded a 529 plan and have no further needs to meet in terms of tuition, room and board.
Parents can also take penalty-free distributions from retirement accounts of as much as $5,000 within a year of the birth or adoption of a child. Before, they would have paid a 10% penalty (assuming they withdrew retirement funds before age 59 ½.