What is the Secure Act and How Could it Affect Retirement?January 10, 2020
What is the Secure Act 2020?
Secure Act Summary:
- The date that you have to take a Required Minimum Distribution (RMD) from your traditional IRA has been extended from 70 ½ to 72. This will allow you to grow your IRA for an additional 1.5 years.
- You are now permitted to continue to contribute to your traditional IRA as long as you are still working.
- You can withdraw up to $5,000 from your IRA, 401K or other retirement accounts following the birth or adoption of a child. The withdrawal is subject to income tax but is not subject to the 10% early withdrawal penalty. Married couples can each make the withdrawal. Special rules apply for adoptions so be sure to consult your tax advisor.
- 401K Plan administrators will be required to provide a new disclosure statement showing how much money you could get each month if your total 401K account was used to purchase an annuity. It will be at least ONE year before we start to see these statements.
- The rules for automatic enrollment in an employer-provided 401K are changing. Employers can force employee contributions up to 15% starting in an employee’s second year of participation. Many employers start at 3% and increase it each year. The rule change increases the cap from 10% to 15%. Employees can still opt out of participation. The hope is that if mandatory contributions are low in the 1st year fewer employees will opt out and thus start saving for their retirement.
- Amounts paid for graduate or post-doctoral study/research stipends, fellowship awards, etc. will now be considered “income” for purposes of making an IRA contribution. The goal is to allow these persons the ability to start saving earlier for their retirement.
NOW THE BAD NEWS:
- The Stretch IRA concept is being eliminated. All funds in an inherited IRA must be distributed to non-spousal beneficiaries within 10 years of the IRA owner’s death. This rule also applies to 401K accounts and other defined contribution plans.
- There is an exception that allows for lifetime distribution when the beneficiary is a minor, disabled, chronically ill or not more than 10 years younger that the deceased IRA owner. For a minor, the exception ends when they reach the age of majority and then the 10-year rule kicks in.
- For a spouse, RMD’s are delayed until the end of the year that the deceased IRA owner would have reached age 72 instead of 70 ½ under the current rules. Most spouses will continue to roll the deceased spouse’s IRA into their own IRA.
- 401K loans can no longer be made in the form of a credit or debit card.
While most of the changes of the Secure Act are effective for tax years beginning 1/1/2020, the credit card prohibition is effective immediately and the loss of Stretch IRA’s impacts dates of death on or after 1/1/2020.