Recently, the House and the Senate passed a $1.4 trillion spending bill which includes the Secure Act, now one the biggest legislative changes to the US retirement system in years. This bipartisan bill was signed into law by the President as an early Christmas present on Friday, December 20th.
Here are a few key features affecting retirees by the Secure Act:
Inherited IRAs – Substantially fewer designated beneficiaries will be able to ‘stretch’ Inherited IRA distributions over the remainder of their lives. A new rule on inherited IRAs will eliminate Required Minimum Distributions (RMDs) during the first nine years after the original owner’s death, rather whatever is left in the inherited IRA must all be distributed by the end of the 10th year.
This new 10-year rule will not apply for the following beneficiaries, 1) Surviving spouses, 2) Disabled beneficiaries, 3) chronically ill, 4) Beneficiaries that are not more than 10 years younger than the owner, and 5) minor children.
These new rules will take effect for beneficiaries who inherit IRAs beginning January 1, 2020.
Required Minimum Distributions – Here is some good news! For anyone who has not already reached age 70.5 by the end of 2019, the new age to begin RMDs will be 72. This could have implications on any Roth Conversion strategy you’re contemplating.
As a quick refresher, your RMD is typically the sum of all your IRA account balances as of December 31st of the prior year divided by a distribution factor the Uniform Lifetime Table provided by the IRS.
As an example, for an individual that turned 70 on November 1st of 2019, they will now have until April 1st, 2022 to take their first RMD from their IRA. Prior to the Secure Act they would have had to take their first RMD by April 1st, 2021.
Traditional IRA Contributions – According to a 2019 report by AARP, 20% of the adults over 65 years of age are actively working or looking for work. [i] Prior to the Secure Act, individuals above 70.5 years of age were prohibited from contributing to a Traditional IRA. With the passing of the Secure Act, the maximum age for contributions to a Traditional IRA will be repealed allowing adults earning income at any age to make contributions to their Traditional IRA.
Multiple Employer Plans – These plans which allow multiple employers to participate in one single retirement plan had existed prior to the Secure Act, but key provision changes will now make these plans substantially more competitive than prior to the Secure Act. The ‘one bad apple’ rule will be eliminated which disqualified the entire plan if one member failed ERISA requirements. Secondly, the Secure Act also eliminates the nexus requirement, which stipulated all members of the MEP had to have common interest in addition to participation in the plan.
These changes will now likely open the retirement plan marketplace to streamlined services and cost efficiencies for employers and employees alike.
Penalty-free Withdrawals in the Case of Child Birth or Adoption – Section 113 of the Secure Act will now allow penalty free distributions up to $5,000 in the aggregate within one year following an adoption being finalized or a child being born. NOTE: This only relates to the 10% penalty. Income Taxes will still be owed based on the distribution amount.
These exciting changes mean many new features available for the employees, employers, retirees and almost all individuals. While we highlighted some features above, there are many additional provisions and rule changes associated with the Secure Act.
Additionally, these rule changes will adjust the landscape for retirement planning. If you have questions about how these changes relate to your specific financial situation, your financial advisor at Innova Wealth Partners is here to educate you on taking advantage of these changes.
Here are some additional resources to learn about the SECURE Act:
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