The SECURE Act brought big changes to retirement rules on January 1, 2020. And while there are many changes, the most significant ones affect people in or nearing retirement, as well as new parents and people doing estate planning.
Here, we cover four of the changes with the biggest impact. To learn how these and other SECURE Act provisions may affect you, we encourage you to talk to one of our CUSO Financial Services, L.P. ("CFS")* financial advisors. Consultations are complimentary for Patelco members, and our advisors can meet over the phone or in a branch. Virtual and video appointments are also available.
RMDs saw changes
The starting required minimum distribution (RMD) age is now 72
A required minimum distribution – or RMD – is the minimum amount that must be withdrawn from certain retirement plans, including IRAs. Essentially, they exist as a safeguard against people using a retirement account to avoid paying taxes. The specific RMD amount is determined by an IRS table.
Under the new SECURE Act rules, you don’t have to start making RMDs until you’re 72, provided that you turn 70½ in 2020 or later. (If you turned 70½ in 2019, the old rules apply.)
The deadline for taking your first RMD is April 1 of the year following the year you turn 72 (or 70½ if you’re under the old rules). For instance, if you turn 72 in 2021, you have until April 1, 2022 to make your first RMD.
The CARES Act suspended RMDs in 2020
The government’s COVID-19 emergency stimulus package made one additional change: it suspended RMDs in 2020. This gave accounts more time to recover from stock market downturns, and retirees who could afford to leave accounts alone got the benefit of not being taxed on mandatory withdrawals.
Planning implications of the new RMD rules
Overall, this change is good news for most people, as it provides more flexibility via the option to delay RMDs if the money isn’t needed yet. However, some retirees who choose to delay RMDs until age 72 may be increasing their tax bill later in retirement. We recommend talking to your tax advisor about the tax implications of your decision.
Traditional IRA contributions can now be made after age 70½
In the past, anyone over 70½ could not contribute to a traditional IRA. But under the new rules, as long as you have earned income (wages or self-employment income), you can make traditional IRA contributions. If you’re already retired without any earned income, this doesn’t affect you. And this change doesn’t apply to direct Roth IRA contributions either, but does have implications for IRA conversions.
What are the planning implications of this change? This change is most beneficial for people who are still earning income and who are not already making RMDs from a retirement account. If you’re already taking RMDs, you should talk to your tax advisor or one of our CUSO Financial Services, L.P. ("CFS")* financial advisors. Our advisors can also help you figure out how this rule interacts with IRA conversions.
There are new SECURE Act inherited IRA rules
Under the SECURE Act, many beneficiaries who inherit a retirement account will be required to distribute those assets within 10 years. (In the past, most people who inherited a retirement account were able to distribute the assets over their expected lifetimes.)
Under the new 10-year rule, there is no annual distribution requirement for inherited retirement accounts, but all the assets have to be taken out before the end of the 10th year. If all the assets aren’t distributed by then, the remaining amount will be subject to a 50% penalty. Fortunately, the new 10-year rule does not affect existing inherited accounts (those where the original holder died in 2019 or before).
Some beneficiaries – known as “eligible designated beneficiaries” – are exempt from the 10-year rule, including surviving spouses, minor children, disabled individuals, the chronically ill, and beneficiaries less than 10 years younger than original holder (often a sibling). You should talk to your tax advisor or one of our CUSO Financial Services, L.P. ("CFS")* financial advisors to see what applies in your case.
What are the planning implications of this change? This provision has significant estate planning implications, especially where trusts have been created to receive retirement account assets. Anyone who is likely to leave a significant amount to heirs should meet with a tax advisor or one of our CUSO Financial Services, L.P. ("CFS")* financial advisors to reassess their plans.
Penalty-free retirement withdrawals are now allowed for birth or adoption expenses
Typically, early withdrawals from a retirement account trigger tax penalties. But under the new rules, there’s an additional exception: parents can now withdraw up to $5,000 from a retirement account to pay for birth and/or adoption expenses. The regular tax rules apply for the pre-tax contributions, but the 10% early-withdrawal penalty won’t apply.
What are the planning implications of this change? While flexibility is good, you should recognize that exercising this option can greatly reduce the amount you’ll have in your account when you retire. You should talk to your tax advisor or one of our CUSO Financial Services, L.P. ("CFS")* financial advisors to consider potential consequences before taking out these penalty-free funds. That said, adoption and birth can be expensive, so this change could help many families.
* We want to remind you that non-deposit investment products and services are offered through CUSO Financial Services, L.P. ("CFS"), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Patelco Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members. Financial Advisors are registered to conduct securities business and licensed to conduct insurance business in limited states. Response to, or contact with, residents of other states will be made only upon compliance with applicable licensing and registration requirements. The information in this website is for U.S. residents only and does not constitute an offer to sell, or a solicitation of an offer to purchase brokerage services to persons outside of the United States. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, Certified Financial Planner™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.