Major Changes for Retirement Accounts
By: Financial Hotline
Spring 2020 (Vol. 38, No. 1)
In a bipartisan effort, Congress passed the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE ACT) which focuses on retirement security. On December 20, 2019, President Donald Trump signed it into law. Most but not all provisions took effect on January 1, 2020.
Here are the key points you need to know about the SECURE Act:
- Eliminates the age restriction on traditional IRA contributions.
- Increases the age to take Required Minimum Distributions (RMDs) to age 72.
- Allows withdrawal of $5,000 from a retirement account following the birth or adoption of a child without paying the 10% early withdrawal penalty (there may still be tax consequences).
- Provides certain part-time employees eligibility for a 401k from their employer. Part-time employees who have worked at least 500 hours over the last three consecutive years and are 21 years old by the end of the three years may be eligible.
- Adds “lifetime income disclosure statements” to 401k statements for plan participants to illustrate the monthly payout if the 401k balance is used to purchase an annuity.
- Allows for additional annuity options to be provided to 401k participants since the SECURE Act eases the liability risk of the plan sponsor from offering these annuities.
- Boosts the cap for the employee contribution in a qualified automatic contribution arrangement for a 401k from 10 percent to 15 percent after the employee’s first year of participation.
- Benefits small employers by increasing the tax credit for their retirement plan startup costs, and allows a new $500 tax credit for those 401k and SIMPLE IRAs that include automatic enrollment.
- Makes it easier for small businesses to join together to set up plans for their employees.
- Discourages loans from a 401k by prohibiting loans through a credit or debit card arrangement. n Allows 529 college savings plans to be used for qualified student loan repayments up to $10,000 annually.
THE CARES ACT WAIVED 2020 RMDS for owners or beneficiaries of traditional IRAs and IRA-based account sas well as profit-sharing, 401(k), 403(b) and 457(b) plans.
This also applies to anyone who reached 70½ in 2019 and had until April 1, 2020, to take their first RMD— unless they had already taken their 2019 RMD during calendar year 2019.
WHAT IF YOU HAVE ALREADY TAKEN YOUR RMD FOR 2020 AND WANT TO PUT IT BACK IN? You can roll that back in if you meet the timeframe allowed. If you took your 2020 RMD before January 31, 2020, the deadline to put it back has already passed. However, 2020 RMDs taken between Feb. 1, 2020, and May 15, 2020 have an extension to July 15, 2020, to roll the funds back in.
For those directly affected by the pandemic, the CARES Act allows for a “penalty-free” distribution through Dec. 31, 2020, of up to $100,000 from traditional IRAs and IRA-based accounts, as well as profit-sharing, 401(k), 403(b) and 457(b) plans. Keep in mind, you still owe the tax due on the distribution, you just do not have the 10% penalty.
The Act states: The provision applies to individuals who have been diagnosed with “the virus SARS-CoV-2” or “coronavirus disease 2019”, individuals whose spouse or dependent is diagnosed with such virus or disease, or individuals who experience adverse financial consequences as a result of the pandemic including:
- being quarantined, furloughed or laid off or having reduced working hours
- being unable to work due to lack of childcare
- losing or reducing hours of a business owned or operated by the individual
You may spread the taxes evenly over a three-year period, and you may repay the amount to an IRA or other eligible retirement plan that allows rollover contributions. You have to make the repayment within three years of the date you took the distribution.