By: Donna Lea
If Congress has been busy! A few days before Christmas 2019, they passed the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). Barely three months went by and COVID hit. Congress scrambled to put something together to give Americans increased flexibility as related to their retirement funds. They passed the Coronavirus Aid, Relief, and Economic Security (CARES Act) in March 2020. Both of these legislations will affect everyone with a retirement account.
The SECURE Act was passed with the intention of helping Americans save for retirement. Below are a few major highlights that affect every worker and retiree.
- Required Minimum Distributions (RMDs) – Previously, the minimum age to start RMDs is 70.5. That has been increased to 72 years old for anyone who HAS NOT reached 70.5 by 12/31/2019.
- Maximum IRA contribution age – In the past, no more IRA contributions can be made once RMDs (age 70.5) begin. This has been completely removed and there is no upper age limit for contributions. However, all requirements still apply (ie. earned income, deductibility limits, etc.)
- Elimination of S-T-R-E-T-C-H IRA – This one is a game changer. While there is technically, no such registration as a “Stretch IRA”, it’s the term for those who inherit an IRA and are stretching the RMDs over their lifetimes. It’s a way to maximize tax- deferred growth. Well, no more of that for deaths that occur in 2020 or thereafter. This is one way the IRS is able to accelerate tax collection on the account.
- Beneficiaries who inherit an IRA or Roth IRA after 12/31/2019 will need to deplete the account within 10 years. The pace can be done at the discretion of the beneficiary. The important thing is in 10 years, the account must be completely depleted or there is a 50% penalty.
- There are a few exceptions to the 10-year rule, so stretching is still a possibility if the beneficiary is a:
- Spouse
- Legal minor child – once the child reaches age of majority (18 in most states), the 10-year rule applies
- Disabled/chronically ill individual
- Individual not more than 10 years younger than the decedent
- Due to the 10-year rule, trusts that were listed as beneficiaries should be reconsidered. Many trusts were written under previous tax rules and often require/restrict distributions to RMDs only. If not amended, the beneficiaries may end up with a large tax bill in year 10. Please take this opportunity to discuss with your estate planning attorney on whether any changes need to be made.
- This elimination allows for a multitude of planning opportunities. Please talk to your financial advisor about possible strategies to offset this change.
- Eligibility requirements for 401K – Employers must include part-time employees with at least 500hr and 3 years of service.
Many of the new rules were signed late December and are effective January 1. Financial firms have barely started to digest the next rules when COVID-19 hit. This quickly became a global pandemic. The economy grinding to a standstill in such a short period of time was so unprecedented that Congress had to come up with a stimulus plan to prevent the economy from falling apart. The quick-thinking of the government prevented the economy from going into a depression. However, it was put together so haphazardly, that there have been many revisions since President Trump initially signed it back on 3/27/2020.
The CARES Act is the largest economic stimulus plan ever at $2.2 trillion. To put it in perspective, the stimulus plan during the sub-prime mortgage crisis back in 2009 was about $400 billion. The intent of the CARES Act was to help anyone who has been affected by COVID, effectively everyone.
Below are some key provisions that are applicable to participants of an individual or group retirement plan. Please note that these are Federal guidelines. Each state has their own rules that may or may not match the federal changes for 2020.
- Required Minimum Distributions (RMDs) – Normally, anyone over the age of 72 (increased from 70.5 just 3 months ago) who has funds in a pre-tax retirement account or anyone who inherited a retirement account must withdraw a certain percentage from that account annually or be faced with a 50% penalty. This requirement has been waived for the year 2020. If the RMD was already taken, it can be rolled back in within 60 days. This does not apply to Defined Benefit or Cash Balance Plans, as RMDs on those accounts still must be taken. There is hardly a reason to take a RMD when it’s not required. Discuss with your financial advisor if it makes sense to consider increasing a conversion to a Roth IRA instead.
- Loans – Plan sponsors can amend 401k Profit Sharing and Defined Benefit Plans to include coronavirus-related loans for Qualified Individuals*:
- Loans are available up to $100K or 100% of the vested balance. The loan must be taken within 180 days of 3/27/2020 (by 9/23/2020). This is an increase from the statutory limitations of previously allowed $50K or 50% of the vested balance.
- Any existing loan payments that are due between 3/27/2020 and 12/31/2020 may be delayed for up to 12 months.
- Distributions – Plan sponsors of 401k Profit Sharing, 403B, 457B can amend plans to include an in-service withdraw of up to $100K for a Qualified Individual* through 12/30/2020. The 20% withholding and the 10% early penalty can be waived, but the distribution is still taxable. The taxes can be spread out over 3 tax years and if the funds are put back within 3 years, no taxes are due. The funds can be returned into an account different than the original account. Will likely need to file a tax return amendment if funds are returned back into the account.
- Coronavirus-related loans and distributions require the participant to be a Coronavirus-Related Eligible Participant or a Qualified Individual*. To qualify, the participant needs to satisfy one of the following requirements:
- Individual, spouse, or dependent who tested positive for COVID-19
- Self-certify that he/she has been affected financially by COVID via furlough, laid off, reduced hours, business closure, unable to work due to lack of childcare, etc.
There has been a lot of changes related to retirement account in the last few months. Please reach out to your financial advisor regarding these changes.
Author: Donna Lea is the President of Financially Yours Advisory Services, a full- service financial planning firm that specializes in working with young families, retirees, and small businesses. She has her Certified Financial Planner ™ designation and serves her clients with a pro-active approach while providing personalized service. Being an independent financial advisor allows her to use a wide range of products without regard to corporate restraints. She takes a holistic approach to her clients’ needs, commonly coordinating with their other professionals. Each professional has an area of expertise, but it requires a coordination of efforts to bring a solution to fruition. For more information about her practice, please visit www.financially- yours.com, or email her at donna@financially-yours.com. Her office is located at 1420 East Chapman Ave. Orange, CA 92866 and you can reach her at (714) 704-9085.