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Retirement Savings Rules Change Under New SECURE Act

Edge Magazine

The Setting Every Community Up for Retirement Enhancement Act of 2019 was signed into law on December 20, 2019 as part of the federal government spending bill. The SECURE Act includes many provisions intended to help Americans save more for retirement.

The Act includes pension-related provisions that incentivize employers to adopt employer-sponsored plans and provide lifetime income options to employees, and also requires long-term part-time workers to be included in an employer’s 401(k) plan. As Americans live and work longer, the Act allows those who are still working to make contributions to a traditional IRA beyond age 70½.

The Act also makes changes to plan distribution requirements from employer-provided qualified retirement accounts (i.e., 401(k) accounts), traditional IRAs, and individual retirement annuities. Under prior law, an individual generally must begin “required minimum distributions” on April 1 of the calendar year following the later of the calendar year in which he or she reaches age 70½ or retires. The SECURE Act increases the age for RMDs to age 72 for individuals who reach age 70½ after December 31, 2019. The prior RMD age was based on life expectancies set in the early 1960s. This change has the potential to allow retirement accounts to grow without being reduced by distributions and taxes. If you turn 70½ in 2020, you should review your overall financial plan and potentially reconsider your withdrawal plans.

The SECURE Act also changes the rules for post-death RMDs by removing the “stretch-IRA” provisions. Under prior law, with proper planning a beneficiary could stretch out the RMDs over his or her own life expectancy, allowing longer tax-deferred growth. Under the new law, for account owners who pass away on or after January 1, 2020, most beneficiaries are required to take their entire inherited retirement account within 10 years of the decedent’s death. This is the revenue raising component of the SECURE Act. There are exceptions for surviving spouses, minor children, as well as disabled and chronically ill beneficiaries.

In light of the SECURE Act’s changes to the post-death distribution rules, it is important to review your beneficiary designations, particularly if you’ve named a trust as a beneficiary to your retirement account. More than likely, your trust will need to be updated to comply with the new rules regarding distributions from inherited retirement accounts.

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