As the year turned from 2019 to 2020, there stealthily rolled in several of the most sweeping reforms to retirement and tax legislation in a decade or so (outside of the 2017 Tax Cuts and Jobs Act, or TCJA). The recent changes apply to IRA, 401k and other retirement savings accounts. If any of these apply to you then please read on:
- Inherited IRA
- Turning 70½ this or next year
- Own a business with or proposing a 401k plan
- Working for a small company and do not have access to a 401k plan
- Need an early distribution for reasons of qualified birth or adoption
The piece of legislation that passed is called the SECURE Act. As with most pieces of Congressional legislation there are positives and negatives.
Probably the most glaring “negative” is that those who inherit IRA or other retirement accounts from a deceased non-spouse relative (like a parent or uncle or aunt) will be taxed FAR SOONER and in a BIGGER CHUNK than previously. This means that instead of being able to “stretch” an IRA or other retirement account over the beneficiary’s life time, thus being able to minimize the timing of the taxation on the required withdrawals (or RMDs), the beneficiary will need to withdraw ALL of the money from the inherited IRA within 10 years. Kind of a bummer if you were wanting to stretch the money out for as long as possible and minimize taxes in possibly your highest earning years.
On the positive side, the AGE at which a person must begin withdrawing monies from an IRA has gone UP to 72 from 70½, while maintaining the qualified charitable distribution allowance at age 70½. In addition, the maximum age for a worker to be allowed to contribute to an IRA is now unlimited (it used to be capped out at age 70½). People are working and living longer!
Back to the negative side (if you own a business and are trying to minimize costs of a 401k plan). The costs of maintaining a plan will INCREASE due to a lower “barrier to entry” for part-time workers. A feature that helped business owners with the administration – and costs – of a 401k plan used to allow an employer to limit eligible participants to a minimum of 1,000 hours worked in a year. That minimum has gone DOWN to 500 hours worked in at least 3 consecutive years.
From a part-time worker’s standpoint, the 500-hour minimum may be helpful, as are several aspects of the SECURE Act. Typically, though, part-time workers have not taken advantage – on enough of a scale while maintaining their money in the 401k plan – for the eligibility of certain part-time workers to make sense for small- and medium-sized employers.
Finally, a positive (among other positives in the SECURE Act) is that there is now an allowance for a penalty-free distribution from a retirement account of up to $5,000 for a qualified birth or adoption.
There is more to the SECURE Act, but I do not want to cut into your weekend! Please always call me with questions or comments. I love hearing from my readers.