Significant Retirement Savings Law Changes For 2020

Congress has recently passed significant changes to retirement savings law that will affect individuals, small businesses and employees, and could have a major impact on estate planning. 

The retirement savings bill, known as the SECURE Act, (an acronym for the “Setting Every Community Up for Retirement Enhancement”) was included as part of the massive government spending bill that was approved by Congress in a flurry of last-minute deal-making in mid-December. The 1,773-page bill was one of two bills to fund government operations averting a government shutdown. The shutdown would have taken place on December 20 when a temporary agreement to fund the government was set to expire. The bill was approved by the House of Representatives on December 17, and the Senate followed suit on December 19. President Donald Trump signed it into law on December 20.

Key provisions in the retirement savings portion of the bill include:

  • Change to RMD age: The law raises to 72, from 70½, the age at which individuals must begin taking RMDs from their retirement accounts. Important: The new law only applies to people who turn 70½ after December 31, 2019. If a person turned 70½ in 2019, the law does not apply—that person must take an RMD in 2019, 2020 and beyond.

  • Contributions to traditional IRAs after age 70½. The law ends the prohibition on contributing to an individual retirement account (IRA) after 70½. Individuals may continue contributing to an IRA at any age, as long as they have earned income.

  • New rules for inherited retirement accounts: Under current law, inherited retirement accounts (often referred to as “Stretch IRAs”) can distribute those assets over the beneficiary’s lifetime. Under the new law, those assets must be distributed within 10 years. This provision has potentially significant estate planning implications. There are exceptions for spouses, minor children, disabled individuals and people less than 10 years younger than the decedent. The bill does not affect existing inherited accounts. It only applies to accounts that are inherited in 2020 and beyond.

  • Penalty-free withdrawals for birth/adoption expenses. New parents can withdraw up to $5,000 from an IRA or an employer-sponsored retirement plan to pay for birth and/or adoption expenses, through the first year after the birth or adoption. Taxes still need to be paid on pre-tax contributions, but no early withdrawal penalties apply to the withdrawal.

  • Part-time workers can participate in a 401(k) plan. Employees must have worked at least 500 hours a year for three consecutive years in order to be eligible.

  • Lifetime income disclosure. The bill requires the Department of Labor to propose rules for a new disclosure to plan participants that will illustrate the participant’s projected monthly income in retirement based on current retirement assets. It’s designed as a kind a “progress report” to show employees how they are doing on saving. The rule-making process for this is likely to take a year or more, followed by an implementation period, so it could be 2021 or 2022 before this becomes standard.

  • Easier potential for annuities to be offered in 401(k) plans. The new law lowers barriers to offering annuities in employer-sponsored plans, though plans are not required to do so.

  • Change to 529 plans. Assets in these college-savings plans can now be used to repay up to $10,000 in student loans.

  • Provisions to help small businesses. Several provisions in the bill are designed to make it easier for small businesses to offer retirement plans to their employees, including a provision that will allow unrelated small businesses to band together in so-called “multiple employers plans” to offer a plan to employees.

Since this new law includes the most significant changes to retirement savings regulation which has occurred in years, it is important individuals and small business owners carefully consider how these changes will affect them in 2020 and beyond. 

Your tax and financial advisors here at Lewis Group, CPAs are available to answer your questions and to help you navigate the ever-changing tax laws. We look forward to helping you achieve your retirement and estate planning goals.