With the overwhelming amount of information that has been thrown at us this year related to the Coronavirus, you may have missed seeing the sweeping changes to retirement plans that have been enacted recently. Here’s a summary of some of the most important provisions.
The SECURE Act, which was signed into law on December 20, 2019 and effective January 1, 2020 came with these changes:
It raised the age for Required Minimum Distributions (RMD) from most retirement plans and raised the age for contributions to IRAs.
- Under prior law, once someone reaches the age of 70.5 they are forced to take annual minimum distributions from most types of retirement plans (with the exception of Roth IRAs). The new law raises that age to 72 for those that were born on July 1st, 1949 or later.
- The ability to make contributions to an IRA ceased at the age of 70.5 under prior law. Now, that has been repealed. As long as you are working and have earned income you can continue to make contributions to your IRAs.
While the above were welcome changes to IRA owners, the SECURE Act, unfortunately, also came with a major disadvantage. It repealed the “stretch IRA”, which was an estate planning strategy that allowed non-spouse beneficiaries of IRAs to take minimum annual distributions over their life expectancy. That effectively allowed them to spread out the tax liability over a long period of time, allowing the funds to grow in a tax-deferred environment along the way. With a few exceptions, the new law requires non-spouse beneficiaries to withdrawal all funds from inherited IRAs within 10 years.
The CARES Act was signed into law on March 27, 2020. Notable changes to retirement plans are as such:
Those Required Minimum Distributions we discussed above are suspended for 2020. This includes RMDs from all IRAs, 401(k)s and 403(b) plans. If you already took your RMD before the law went into effect, you may be able to put the funds back. This is tricky, so you’ll want to consult with your advisors.
Under most circumstances, if you withdraw money from a retirement plan before the age of 59.5 there is generally a 10% tax penalty associated with those withdrawals. The CARES Act waves that penalty for withdrawals up to $100,000 in the year 2020 for people who are impacted by COVID-19 (due to layoff, reduced work hours, sickness). The IRS will allow you to pay the income tax owed on the distribution over a three-year period of time. Furthermore, those distributions can be re-contributed to an eligible retirement plan within three years.
The CARES Act also includes a provision that allows participants in company retirement plans (such as 401(K)s), who are impacted by COVID-19, to borrow 100% of their vested balance, up to a maximum of $100,000. Furthermore, upon request, repayments due on outstanding loans can be deferred for up to 12 months.
These are just a few of the new rules enacted. As always, you should do further research and consult with your advisors to see how they may affect you. Feel free to call or email me if you would like to discuss your situation. I’d be happy to answer your questions with no obligations.