Happy New Year! I wanted to pass along a note we put out on some new laws in 2020 affecting retirement accounts. Please let me know if you have any questions.
New Laws can Help You Save More for Retirement
With the passage of the government’s new spending bill in December comes several changes that will increase many Americans’ ability to save money for retirement. The SECURE (Setting Every Community Up for Retirement Enhancement) Act goes into effect January 1, 2020 and has many provisions designed to boost retirement savings and expand the ranks of those who can contribute to IRAs and 401(k) plans.
The Main Benefits
Before the passage of SECURE, most people were required to start taking distributions from their IRAs and 401(k) plans when they turned 70 ½ years old. This required minimum distribution (RMD) is considered taxable income. Under the new law, the age for RMDs is now 72 years old starting in 2020. This gives seniors an extra year and a half to let their assets grow tax-deferred before they are required to take money out of their retirement accounts and pay accompanying taxes. If you turned 70 ½ during 2019 and should be taking RMDs, you are still required to take the RMD in 2020 and beyond. However, if you turn 70 ½ in 2020, you can wait until age 72 to start taking your RMD.
Another important age-based change in the new law is the repeal of the rule that prohibited contributions to an IRA after the age of 70 ½. Now, if you have earned income, you can contribute to a traditional IRA past the age of 70 ½ regardless of your age. As before, there are no age-based restrictions on contributions to a Roth IRA.
There is also good news for part-time employees. This new law expands who can contribute to their firm’s 401(k) plan. Previously, employees who worked less than 1,000 hours during the year were not allowed to participate in their firm’s 401(k) plan. Beginning in 2021, employees who have worked at least 500 hours per year for at least three consecutive years are eligible to participate in their firm’s 401(k) plan. The employee must be 21 years old by the end of the 3-year period and cannot be working under a collective bargaining agreement to qualify.
Some Other Potential Benefits
- People with new babies or adopted children can withdraw up to $5,000 from their IRA or 401(k) planswithout paying the 10% early withdraw penalty. Married couples can take $5,000 each to cover to expense associated with their growing family. However, incomes taxes will apply unless you repay the funds, and this rule does not apply if you are adopting your spouse’s child.
- Plan sponsors can now offer annuities and other lifetime income products to their participants.
- Individuals pursuing graduate or post-doctoral studies or research can now consider stipends, fellowships or similar payments as compensation for the purposes of making IRA contributions. The goal is to incentivize young people to start saving for retirement earlier.
And One Big Negative
- Under the new law, distributions from inherited IRAs to non-spouse beneficiaries are not allowed to be “stretched” over the recipient’s lifetime. In other words, all funds from an inherited IRA must be distributed to non-spouse beneficiaries within 10 years of the IRA owner’s death. While there are exceptions for minors, the disabled and the chronically ill who are not more than 10 years younger than the deceased, this could mean that many people inherit funds during their prime earning years and will have to take distribution at a higher tax rate than if they were able to stretch the distributions over the rest of their lifetime. For minors, luckily, the 10-year rule does not kick in until the child reaches the age of maturity. Luckily, for those who inherit their IRA before January 1, 2020, the accelerated distribution plan does not apply.
Overall, the new SECURE Act rules are designed to allow people to start saving more towards their retirement at an earlier age. It also lengthens the number of years that workers can put money into retirement plans and increases the number of people who can save using these products. The chart below shows the positive impact of starting your savings at an earlier age.
Chatham Wealth Management is here to help people with their financial planning and investment management in order to attain the lifestyle they desire in retirement. Please contact us at (800)472-8086 or find us at www.chathamwealth.com if you would like a complimentary review of your financial situation.