Signed into law in late 2019 and effective January 1, 2020, the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) is one of the broadest pieces of legislation impacting retirement planning in nearly a decade.
The intent of the law is to strengthen retirement security by improving access to tax-advantaged retirement plans. This includes a number of provisions aimed at small businesses, as well as modest changes to a few longstanding IRA rules.
For the majority of investors, it’s the provisions of the SECURE Act which target key IRA rules that will prove most relevant, as these changes may directly impact your ability to save for retirement and how your retirement assets are used over time. These provisions include:
- Removing the maximum age limit for contributing to a traditional IRA
This rule change in particular means investors will have more time to contribute toward their retirement. Prior to the SECURE Act, IRA owners could no longer make contributions to a traditional IRA once they reached age 70 ½. Beginning with the 2020 tax year, investors can continue to make contributions to a traditional IRA so long as they continue to earn taxable income.
- Delaying the age to begin taking required minimum distributions (RMDs)
This rule change is meant to help reduce the risk of investors outliving their retirement investments by providing additional time to allow assets to grow without triggering distributions. Previously, RMDs from traditional IRAs were triggered by reaching the age of 70 ½. Under the SECURE Act, if you were born on or after July 1, 1949, the start of RMDs from a traditional IRA is delayed until the year in which you reach age 72. Note, if you reached age 70 ½ in 2019, your 2019 RMD must be withdrawn no later than April 1, 2020. If you delayed taking your 2019 RMD until 2020, you will also be required to take your 2020 RMD by the end of 2020.
- Ending the “stretch” option for most beneficiaries who inherit an IRA
Prior to the SECURE Act, a beneficiary who inherited an IRA could take distributions from that account over the entirety of their life expectancy. Under the SECURE Act, most designated beneficiaries are now limited by a new “10-year” rule for distributions, though certain exceptions apply. This rule mandates that sufficient distributions be taken from an inherited IRA so as to completely deplete the account by the end of the 10th calendar year following the original IRA owner’s death.
Exceptions to the 10-year rule still remain in place for the following beneficiaries:
- a surviving spouse
- a non-spouse who is disabled or chronically ill
- a non-spouse not more than 10 years younger than the deceased IRA owner
- a minor child of the deceased IRA owner (with the 10-year rule applying to any remainder of their share upon reaching majority)
Regardless of how the end of the stretch option might impact your particular plans for retirement, it’s a good idea to check your beneficiary designations at regular intervals to make sure they’re up to date and aligned with your wishes.
- Adding a penalty exception for “qualified birth or adoption distributions”
The SECURE Act adds a new penalty exception to the list of existing 10% early distribution penalty exceptions that existed prior to the SECURE Act. This new penalty exception would allow for “qualified birth or adoption distributions” up to $5,000. This means you can withdraw up to $5,000 from an IRA to cover related expenses within one year after the birth or legal adoption of a child, and avoid having to pay the 10% early withdrawal penalty if you’re under age 59 ½.
Revisit your retirement planning strategy
The SECURE Act provides new layers of flexibility when it comes to your retirement savings.
Now may be the perfect time to revisit your retirement plans to see how you can take advantage of these changes and how they may impact your retirement income strategy.
For more information on retirement planning, or to discuss your specific retirement plans in greater detail, talk to a PNC Investments Financial Advisor, today. Contact PNC Investments at 855-PNC-INVEST or stop by your local branch.