As a holiday gift, Congress and the President have enacted the SECURE Act, which brings several changes related to retirement planning starting in 2020.
The Setting Every Community Up for Retirement Enhancement Act reforms how you think about retirement plans, savings plans, withdrawals, and inheritances. Here’s what you need to know to plan effectively:
- More Time to Save and Still Work
If you turn 70.5 in 2020, you have some extra time for retirement saving. Until now, when you turned 70.5, you were required to begin withdrawing from your traditional retirement account. The minimum amounts withdrawn annually are known as Required Minimum Distributions (RMDs). The bill shifts the starting withdrawal age to 72 years. This helps the increasing number of people who are still working and want to keep saving. The change has two benefits to savers: It doesn’t force you to reduce the “nest egg” by the amount of the RMD, and it allows all of your savings to compound for an extra 1.5 years.
- Employers Can Now Offer Annuities within 401(k) Plans
Annuities act as insurance for those concerned about having a steady income after working. Employers now can offer annuities within their 401(k) plans. This means that instead of relying on market forces to determine whether your retirement fund is shrinking or growing, you’re guaranteed a steady income. Annuities are complex financial products, generally commanding higher fees than mutual funds, but can serve as a good option if Social Security/pensions doesn’t cover everything. As added security, if an employer stops offering an annuity plan, it can be transferred tax-free to your IRA. Discuss the use of this option with your financial advisor before making any decisions.
- Inherited IRAs Can No Longer Be Spent Over a Lifetime: 10 Year Limit
Previously, inherited IRAs could be spent over the course of a lifetime or passed on to any heirs. Thus, the length of time that this money was available could be stretched over generations, with untaxed wealth being passed on to successors. The SECURE Act mandates that all inherited IRAs must be fully spent within 10 years of the owner’s death. Surviving spouses and minor children are exempt from this new law, and as beneficiaries, can continue to stretch their IRAs over their lifetimes. If you are planning to pass your IRA on any beneficiaries, contact a trusted financial advisor to see how to best accommodate for this new change.
- 529 Plans Became More Flexible, Enabling Better Retirement Savings
529 plans, which are savings dedicated to future educational costs, now can be applied towards apprenticeships, homeschooling, and student loans up to $10k. People who didn’t save for such expenses in the past often invaded retirement savings to pay for them. In addition to depleting your retirement savings, if you were under 59.5, a 10% penalty was charged. With the new legislation, you can now keep your money in the retirement accounts and avoid steep, early-withdrawal penalties. Bottom line: if you’re saving for any education/career training for your kids – use all available savings vehicles to get there.
How will you adjust your retirement and saving strategy as a result of the new changes? Share with other members!
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