401 (k), IRAs and required minimum distribution ages all see changes
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Southfield, Mich.—January 3, 2020— While the Setting Every Community Up for Retirement Enhancement (SECURE) Act may have officially entered the scene at one of the quietest news times of the year, it was lurking behind the scenes, waiting to pack a big punch with its impact for 2020 and beyond, according to Margaret Amsden, CPA, who heads domestic tax strategies for clients at Michigan-based Clayton & McKervey.
“The Secure Act was kicked around for most of the year, but ended up being passed as part of the year-end appropriations bill and signed by President Trump on December 20, 2019. The Act’s ramifications are dramatic, changing much of our traditional thinking about retirement planning, specifically as it relates to Individual Retirement Accounts (IRAs) and 401k plans,” Amsden said.
The SECURE Act contains more than 25 individual changes in the IRA and qualified plan areas. Amsden highlights a few of the key changes below:
Individual Retirement Accounts
- The SECURE Act changes the starting age for Required Minimum Distributions (RMD) from 70 ½ to 72. This rule started as a way to assure that people, eventually, spent their savings and it did not grow untaxed forever. However, the age was set in the 1960s and adjusted. As individuals live longer, it makes sense to increase the age that distributions start.
- The SECURE Act also removes age 70 ½ as the date individuals are required to stop contributing to their IRAs. Individuals can now contribute to their IRA at any age as long as they have earned income. This addresses situations where people are working later into life and want to continue to defer a portion of the income for retirement.
- The SECURE Act shortens the time a beneficiary has to withdraw money from an IRA. Historically, when someone died, the individual inheriting the IRA was able to withdraw the money over their life expectancy. This meant that when the deceased’s beneficiary was someone much younger (such as a grandchild), the distribution period would be stretched over a long period of time. This has now changed if the beneficiary is someone other than the decedent’s spouse. Generally, the rule is that the beneficiary must now draw the funds over a 10-year period.
- Historically, employers did not have to include part-time employees who work less than 1,000 hours per year in the company’s 401(k) plan. However, it was recognized that because women are more likely than men to work part-time, taking time out to raise a family or care for elderly relatives, these rules were punitive for women saving for retirement. The SECURE Act requires employers maintaining a 401(k) plan to have a dual eligibility requirement under which an employee must complete either a one year of service requirement (with the 1,000-hour rule) or three consecutive years of service where the employee completes at least 500 hours of service.
- Other changes in the 401(k) category include permitting plans to adopt qualified distributions for the birth or adoption of a child, encouraging small employers to adopt automatic enrollment provisions by providing certain credits to the employer, and other modifications intended to simplify the safe harbor rules.
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