Changes to Retirement Plan Rules
You’re probably aware that your employer is putting most of the burden of saving for retirement on you, the employee. Years ago, many employers provided their employees with a pension, which is a retirement plan that pays you a monthly benefit after retirement, generally for the rest of your life. Generally, the employer contributed to the plan but there was little if any requirement for you the employee to contribute. But in recent years the pension has been replaced by plans that are primarily funded by you and about the best you can hope for is a partial match of your contribution by your employer.
Individual Retirement Accounts (IRA’s) and 401(K)’s are the best‐known examples of these employee funded plans. In late 2019 Congress passed tax legislation, called the SECURE Act, which made significant changes to some well‐known rules involving these plans. Retirement plans are designed to provide you with money to be used during your retirement. Some folks do a good job of saving outside their retirement account or have other income during retirement and may not need to take money from their plan to pay living expenses. But these plans have a rule that, once you reach a certain age, you must start taking at least a minimum amount each year. Called a Required Minimum Distribution (RMD), previously once you reached age 70 ½ you had to start taking money from the account each year. The SECURE Act changed the age to begin RMD’s to 72, so If you haven’t turned 72 by January 1, 2020, you can delay taking money from your retirement account until you reach 72. If you turned 70 ½ before December 31, 2019, there is no change for you. You had to start distributions in 2019 or before and the old rule continues to apply to you. If you’ve been saving for retirement by contributing each year to an IRA, the old rule was that, even if you continued to work past age 70 ½, you had to stop contributions in the year you reach 70 ½. The SECURE Act eliminated this requirement so now, as long as you have earned income, you can continue to contribute to an IRA, no matter your age. RMD rules continue to apply so there may be years where you must take an RMD but continue to contribute to an IRA. Age 59 ½ is still the earliest age at which you can take money from your retirement account penalty‐free unless you meet a special exception. There are several exceptions, but the SECURE Act added a new one.
If you tap your retirement account to pay for birth or adoption expenses for a new child, up to $5,000 can be withdrawn without paying a 10% penalty, assuming you’re under 59 ½. The biggest negative to the SECURE Act changes in retirement account rules is the new rule on distributions if you inherit a retirement account. Under old law, assuming you didn’t inherit the account from a spouse, you had to start taking money from an inherited retirement account the year after death of the original owner. But the distributions could be stretched out over your lifetime using government rules of life expectancy. Now, no matter your age, if you inherit a retirement account from a non‐spouse, you must deplete the account in full within 10 years. This rule has been widely discussed and for some, it could significantly change the income tax impact on inherited retirement account distributions. If you have a non‐spouse beneficiary of your retirement account, or if you think you may inherit a retirement account from a non‐spouse, and you would like more information on the impact of the SECURE Act change, please contact our office for more information.
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