The SECURE Act (Setting Every Community Up For Retirement Enhancement), which passed the House with overwhelming support in a 417-3 vote in 2019, was signed into law on December 20th. This is the biggest overhaul to retirement rules since 2006. We wrote about the proposed changes in a previous blog post, but below is an overview of the notable modifications that take effect January 1, 2020.

Increasing the Retirement Age to 72 from 70 ½

Retirement age is extended by two years, so savers will be required to begin taking their required minimum distributions from 401(k)s and traditional IRA accounts at age 72 instead of 70 ½. In addition, the age limit for contributing to a traditional IRA, which is currently capped at 70 ½, is repealed. More people are working beyond age 70 either by choice or necessity, so savers can take advantage of tax-deferred accounts for a longer period of time and keep up with increasing life expectancies.

No More Stretch IRAs

The ability to “stretch” an inherited IRA will be shortened to 10 years. Previously, when an IRA was inherited, the non-spousal beneficiary was able to stretch the required distributions and tax payments over their lifetime. Under the new bill, non-spousal beneficiaries will be required to withdraw the full balance of the account within ten years of inheritance, accelerating the income taxes due and reducing growth potential.

Qualified Charitable Distributions Still Allowed at 70 ½

The Secure Act makes no change to the date at which individuals may begin to use their IRAs to make charitable distributions. The rule allows IRA owners who have reached the age of 70 ½ to make charitable contributions of up to $100,000 and avoid reporting the distribution as income on their tax returns.

Annuities in 401(k) Plans

Individuals with 401(k) plans will be allowed to buy annuities through insurance companies in exchange for contracts that guarantee a monthly income stream. This is an attempt to offer working Americans a product similar to a pension that many corporations used to offer. What workers need to keep in mind is that annuities can drastically reduce the growth potential of their money and eliminate the opportunity to pass excess retirement money to heirs (unless they pay extra). 401(k) statements will also be required to project how much the participants current savings would generate over a lifetime of monthly payments at least once per year. This will give savers an expensive alternate perspective on current progress towards retirement goals.

Children with Investment Income

The 2017 Tax Cuts and Jobs Act stated that minor’s interest, dividends and other unearned income is taxed at the trusts and estates tax rate. This will be repealed and the “kiddie tax” would return to the parents’ marginal tax bracket.

New Parents

New parents will be able to withdraw up to $5,000 penalty free from their IRA or 401(k) plan within one year of the birth or adoption of a child to help accommodate addition expenses associated with having a child.

Employers Without Retirement Plans

Employers without retirement plans will have the option to band together to offer 401(k) plans with less fiduciary liability concern and reduced costs.

Part-time Employee

Employers will be required to grant access to 401(k) style plans for part time employees working 500+ hours per year and have been with the company for over 3 years.

529 Plans

Qualified education expenses for 529 plan funds are expanded to cover student loans.

Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Roberts Investment Advisors, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.