SECURE Act and impact to retirement savings
The Setting Every Community Up for Retirement Act (SECURE Act) was signed into law December 20, 2019 as part of a larger spending bill. Congress intended the Act to expand and preserve retirement savings. While there are many provisions to the Act, here are some key provisions impacting individual retirement accounts (IRAs), qualified retirement plans (QRPs) and 529 plans (529s). See our report, The SECURE Act – Altering the retirement landscape (PDF) for full details.
- Changes to Required Minimum Distribution (RMD) age: Beginning in tax year 2020 the age to start Required Minimum Distributions (RMDs) from Traditional, SEP and SIMPLE IRAs and QRPs has been modified from age 70½ to age 72. (Note: This does not affect individuals who turned age 70½ on or before Dec. 31, 2019)
- New rules for Inherited IRAs: Under the new law, Inherited IRAs are to be emptied by the 10th calendar year following the year of death of the IRA owner or plan participant. Prior to the SECURE act, beneficiaries could distribute the Inherited IRA assets over their lifetime – referred to as the “Stretch” IRA strategy. This provision has potentially significant estate planning implications.
The change is effective for plan participants and IRA owners who pass away after Dec. 31, 2019 and does not affect existing Inherited IRAs. In addition, the new legislation does not apply to certain eligible beneficiaries such as a spouse, minor children of the account owner, chronically ill or disabled individuals, or individuals not more than 10 years younger than the IRA owner.
- Contributions to Traditional IRAs after age 70 1/2: The prohibition on contributions to a Traditional IRA beyond age 70½ has been repealed for contributions made for tax years beginning after Dec. 31, 2019. The individual, or spouse if filing jointly must have earned income to contribute. The Act does not affect Roth IRA contributions because those contributions have never been subject to an age limitation.
- New plan establishment deadline: Instead of setting up a qualified retirement plan by Dec. 31 (for plans operating on a calendar year), plans may be adopted up to the employer’s tax filing deadline, plus extensions, for plan year 2020 and beyond.
- Changes to 529 plans: The use of 529 assets has been expanded to cover a limited amount of costs associated with qualified student loan repayments.
- Annuities and QRPs: Changes to portability features of lifetime income options in retirement plans will benefit both plan sponsors and participants.
- Changes related to small businesses: The use of Multiple Employer Plans (MEPs) and Pooled Employer Plans (PEPs) has been expanded, making it easier for small businesses to offer a retirement plan to their employees. In addition, tax credits have been increased to help defray start-up costs for small business retirement plans.
As with any piece of legislation, especially one with this many changes, it is important to work with your financial advisor, tax professionals and legal advisors to define and prioritize your objectives. Your advisors can help you understand which solutions and strategies may be the most appropriate for your specific circumstances based on the changes brought about by the SECURE Act.
To learn more about these provisions and others not shown above, see our report The SECURE Act – Altering the retirement landscape (PDF).
Keep in mind that Wells Fargo Advisors is not a tax or legal advisor.