Big Changes to Retirement Plans This Year

As 2019 came to a close, Congress passed important reforms that can significantly impact those saving for retirement. The Setting Every Community Up for Retirement Enhancement Act of 2019, better known as the SECURE Act, was passed as part of a year-end appropriations and tax bill. The bill's purpose is to increase access to tax-advantaged accounts.

Any time there is a major tax bill that can affect your investments, it's a good idea to understand the provisions of the new law.

Key Provisions

Major provisions of the SECURE Act include:
  • Repeals the maximum age for making traditional Individual Retirement Account (IRA) contributions.
  • Raises the age for taking required minimum distributions (RMD) from 70½ to 72.
  • Allows withdrawals from tax-advantaged 529 accounts for up to $10,000 per year in qualified student loan repayments.
  • Allows penalty-free withdrawals of $5,000 from 401k accounts for expenses associated with having or adopting a child.
  • Broadens 401k eligibility to many part-time workers.
  • Removes the provision that had allowed the "stretch IRA"; more on this important change below.
The SECURE Act is aimed at the fact that Americans are living longer and they need their retirement savings to last. But it is also aimed at important issues like rising student debt. The law also helps small business owners, who can receive a tax credit of up to $5,000 for starting a retirement plan.

Inherited Retirement Plans

While the provisions in the plan ultimately impact many people, one that may have an immediate and significant impact is the change to inherited plans. This provision was estimated to raise $15.7 billion in tax revenue, so contrary to the other changes this one will be undesirable for many people.

Until now, you could pass your IRA or 401k to your heirs and then they could stretch the distributions and tax payments over their life expectancy. This could allow your children, for example, to stretch out the tax-advantaged compounding of these accounts for many years.

The new law affects accounts inherited from owners who have passed away on or after January 1, 2020. Now, many beneficiaries will be forced to withdraw all assets from an inherited plan within 10 years of the death of the account holder. Exceptions to the new rule are a surviving spouse, a minor child, certain disabled beneficiaries, and those who are less than 10 years younger than the original plan owner.

There are two actions you may need to take here, depending on whether you are the owner or the beneficiary. If you took possession before January 1, 2020 the old rules apply. But if you are an account owner who intended to leave a plan to your beneficiaries, you may want to meet with a tax advisor to determine whether this is still the most tax-efficient strategy.

If you have inherited a plan under the new rules, you likewise need to consider the most tax-efficient timing of the withdrawals. For example, if you know you will have little or no income in specific years, that may be when you want to increase the amount of the withdrawals. Or if you will be living in a state with no state income tax, it might be beneficial to take advantage of that fact.

In any case, if the account is worth a significant amount of money, you should probably meet with a tax advisor to discuss withdrawal strategies.