By Gary Meeks, RICP®
Congress passed the SECURE Act in Dec. of 2019 and it is effective for 2020 and beyond. SECURE stands for “Setting Every Community Up for Retirement Enhancement.” So, what does this mean for you and how can you benefit from this legislation? Let’s take a look.
Required Minimum Distributions (RMDs)
Owners of IRAs and other traditional retirement plans can now defer taking RMDs (required minimum distributions) until age 72. This change applies to individuals turning 70 ½ in 2020 or later. Prior to the SECURE Act, distributions had to begin at age 70 ½.
70 ½ or Older IRA Contributions:
Prior to the SECURE Act, individuals over the age of 70 ½ were prohibited from making non-rollover contributions to IRAs. Good news if your 70 ½ or older and still working: the restriction has now been lifted. These contributions will now be permitted if employment income is still being earned. The new law applies to contributions made after Dec. 31, 2019 and can only be made for tax years 2020 or later. Important note: Deductible IRA contributions made after age 70 ½ cannot also be used as QCDs (Qualified Charitable Deductions).
New Limits on Stretch IRAs
Starting Jan. 1, 2020, the Stretch IRA is not what it used to be. Unless a retirement account beneficiary is an eligible designated beneficiary, the entire account must be distributed by the end of the tenth calendar year following the year of the account owner’s death. Prior to this change, a beneficiary could take distributions over his or her entire lifetime. An eligible designated beneficiary can still take distributions over his or her lifetime. To qualify, a beneficiary must be one of the following: A. the surviving spouse, B. a child (of the original account owner) who has not reached the age of majority (but only until they reach that age) C. someone who is disabled or chronically ill or D. any other person who is not more than 10 years younger than the deceased account owner.
Employer Sponsored Retirement Plans
The SECURE Act provides incentives for small employers to offer retirement plans such as 401ks. The incentives come in the form of increased start up tax credits and a new tax credit for employers who include automatic enrollment in a qualified employer plan.
Also new is the ability of unrelated employers, regardless of industry, to band together and participate in a MEP (multiple employer plan), called a PEP or (pooled employer plan), which, according to the SECURE Act, would be treated as a single plan for ERISA purposes. ERISA is the Employee Retirement Income Security Act, which regulates employer retirement plans. If you work for a small employer that does not provide a retirement plan, now may be a good time to nudge your boss and lobby for him or her to join up. Your boss will get a tax break and you may benefit from being able to participate in a 401k or other qualified employer sponsored retirement plan.
A Note Regarding the (CARES) Act
Coronavirus Aid, Relief and Economic Security (CARES) Act. A few features of the CARES Act include the following: Waives the 10 percent early withdrawal penalty on retirement account distributions for taxpayers facing virus-related challenges. Withdrawn amounts are taxable over three years, but taxpayers can recontribute the withdrawn funds into their retirement accounts for three years without affecting retirement account caps.
Required minimum distributions have been suspended for the year 2020.
Participants may be able to borrow more from their 401ks, up to 100% or $100,000, whichever is less and have an extra year to pay it back. The expanded limits only apply to loans made between March 27 to Sept. 23, 2020. Please note that not all retirement plans allow for loans.
Gary D. Meeks, RICP®, is a registered representative offering securities and advisory services through Cetera Advisor Networks LLC, member FINRA/SIPC, a broker dealer and Registered Investment Adviser. Cetera is under separate ownership from any other named entity. 90 W. 100 N. STE 6, Price, UT 84501 (435) 637-8160.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
Sources: “5 Ways the CARES Act Impacts Retirement Planning” forbes.com April 10, 2020, “The Secure Act-What you need to know” American Funds, “More Choices for Retirement Savings” AARP magazine March 2020.