New law changes RMD and IRA rules
With the decline of traditional pensions, most of us are now responsible for squirrelling away money for our own retirement. In today’s do-it-yourself retirement savings world, we rely largely on 401(k) plans and IRAs.
However, there are obviously flaws with the system because about one-fourth of working Americans have no retirement savings at all — including 13% of workers 60 and older.
But help is on the way. In December, President Trump signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. This new law does several things that will affect your ability to save money for retirement and influence how you use the funds over time.
While some provisions are administrative in nature or intended to raise revenue, most of the changes are taxpayer-friendly measures designed to boost retirement savings.
Here is a description of some of the more important changes likely to affect you. (Unless otherwise noted, all changes apply starting in 2020.)
RMDs starting at age 72
Required minimum distributions (RMDs) from 401(k) plans and traditional IRAs are a thorn in the side of many retirees. Every year, my father grumbles about having to take money out of his IRA when he really doesn’t want to. [And the additional income can push people into higher tax brackets and increase taxes on Social Security income.]
Right now, RMDs generally must begin in the year you turn 70½. (If you work past age 70½, RMDs from your current employer’s 401(k) aren’t required until after you leave your job, unless you own at least 5% of the company.)
The SECURE Act pushes the age that triggers RMDs from 70½ to 72, which means you can let your retirement funds grow an extra 1½ years before tapping into them. That can result in a significant boost to overall retirement savings for many seniors.
No more age limits on IRAs
Americans are working and living longer. So why not let them contribute to an IRA longer?
That’s the thinking behind the SECURE Act’s repeal of the rule that prohibited contributions to a traditional IRA by taxpayers age 70½ and older. Now you can continue to put away money in a traditional IRA if you work into your 70s and beyond.
As before, there are no age-based restrictions on contributions to a Roth IRA.
Annuity info and options expanded
Knowing how much you have in your 401(k) account is one thing. Knowing how long the money is going to last is another.
Currently, 401(k) plan statements provide an account balance, but that really doesn’t tell you how much money you can expect to receive each month once you retire.
To help savers gain a better understanding of what their monthly income might look like when they stop working, the SECURE Act requires 401(k) plan administrators to provide annual “lifetime income disclosure statements” to participants.
These statements will show how much money you could get each month if your total 401(k) account balance were used to purchase an annuity. (The estimated monthly payment amounts will be for illustrative purposes only.)
The new disclosure statements aren’t required until one year after the IRS issues interim final rules, creates a model disclosure statement, or releases assumptions that plan administrators can use to convert account balances into annuity equivalents, whichever is latest.
Speaking of annuities, the new retirement law also makes it easier for 401(k) plan sponsors to offer annuities and other “lifetime income” options to plan participants by taking away some of the associated legal risks.
These annuities are now portable, too. So, for example, if you leave your job you can roll over the 401(k) annuity you had with your former employer to another 401(k) or IRA and avoid surrender charges and fees.
“Stretch” IRAs eliminated
Now for some bad news: The SECURE Act eliminates the current rules that allow non-spouse IRA beneficiaries to “stretch” required minimum distributions (RMDs) from an inherited account over their own lifetime (and potentially allow the funds to grow tax-free for decades).
Instead, all funds from an inherited IRA generally must now be distributed to non-spouse beneficiaries within 10 years of the IRA owner’s death. (The rule applies to inherited funds in a 401(k) account or other defined contribution plan, too.)
There are some exceptions to the general rule, though. Distributions over the life or life expectancy of a non-spouse beneficiary are allowed if the beneficiary is a minor, disabled, chronically ill, or not more than 10 years younger than the deceased IRA owner.
For minors, the exception only applies until the child reaches the age of majority. At that point, the 10-year rule kicks in.
If the beneficiary is the IRA owner’s spouse, RMDs are still delayed until end of the year that the deceased IRA owner would have reached age 72 (age 70½ before the new retirement law).
Credit card access to 401(k) loans prohibited
There are plenty of potential drawbacks to borrowing from your retirement funds, but loans from 401(k) plans are nevertheless allowed. Generally, you can borrow as much as 50% of your 401(k) account balance, up to $50,000. Most loans must be repaid within five years, although more time is sometimes given if the borrowed money is used to buy a home.
Some 401(k) administrators allow employees to access plan loans by using credit or debit cards. However, the SECURE Act puts a stop to this.
The new law flatly prohibits 401(k) loans provided through a credit card, debit card or similar arrangement. This change, which takes effect immediately, is designed to prevent easy access to retirement funds to pay for routine or small purchases. Over time, that could result in a total loan balance the account holder can’t repay.
[In total, there are 29 new provisions or rule changes in the new law, so it’s a good idea to speak with an informed legal advisor or financial planner to see what, if any, changes you should consider to your estate plan.]