Shoppers aren't the only ones hustling and bustling as Christmas approaches.
The U.S. Congress speeded up its typically glacial activity and approved the SECURE Act last week, serving it up just in time for the Christmas recess. The Setting Every Community Up for Retirement Enhancement Act makes several significant changes in retirement-related law, and includes a few other measures too.
President Trump signed the SECURE Act Friday, along with many other pieces of legislation that were tossed into one massive bill (nearly 1,800 pages).
The SECURE Act itself has 29 provisions (go here and scroll to page 1532 to read them in full). Here are the most notable:
- Delayed Required Minimum Distributions: Effective January 1, 2020, the age that will trigger RMDs from traditional IRAs and other retirement accounts will no longer be 70½ but 72. This means account holders will have another year-and-a-half for their nest eggs to grow before hitting the requirement to start taking money out. If you've already turned 70½ (or if you do so before next Wednesday, Jan. 1), sorry, you'll be under the old rules.
Important: Even though the RMD age is changing, 70½ will remain the age at which a taxpayer can make a Qualified Charitable Donation from an IRA. In other words, QCDs remain unaffected (but see the next point below). QCDs can still be made at 70½, but won't be tied to a required minimum distribution.
- No Age Limit for IRA Contributions: The SECURE Act ends the prohibition on making contributions to a traditional IRA after 70½. As long as an IRA holder is still working (i.e., has earned income), he or she can continue to contribute to an IRA.
Post-70½ contributions, however, will affect how much of a charitable gift from an IRA can be characterized as a Qualified Charitable Donation. Such contributions will offset the amount of a QCD. Example: If you contributed $7,000 to a traditional IRA at age 71, then made a $20,000 charitable donation from your IRA, only $13,000 of the donation could be claimed as a Qualified Charitable Donation.
- The "Stretch IRA" Won't Be Quite as Stretchy: As expected (we wrote about this earlier in the year), the SECURE Act has changed the "Stretch" provisions related to money inherited from an IRA or a defined-contribution plan. Formerly, payments from an inherited account could be stretched out over a lifetime (based on the beneficiary's life expectancy).
With the new law, that lifelong stretch is available only to spouses, beneficiaries with disabilities, and those with a chronic illness. Others who inherit retirement accounts must receive the entire proceeds within 10 years. Exception: If a child inherits an IRA from a parent, the 10-year payout clock won't start ticking until the child reaches the age of majority.
(Note: The new stretch rules take effect Jan. 1, 2020, for most retirement accounts, but they won't take effect until 2022 for Thrift Savings Plan accounts and some other government-sponsored retirement plans.)
- Penalty-Free Early Withdrawals for Childbirth and Adoption: The SECURE Act allows up to $5,000 in penalty-free early withdrawals from a retirement plan to cover costs of childbirth or adoption. Caveats: The money may be withdrawn only after the birth has occurred or after the adoption has been finalized. A $5,000 withdrawal may be made for each child born or adopted, but any withdrawal(s) must occur within one year of the related birth/adoption.
- Expanded Use of 529 Plan Money: The new law expands "Qualified Education Expenses" for 529 education savings accounts to cover spending related to "registered" apprenticeships (i.e., certified by the Department of Labor). Further, up to $10,000 from a 529 plan can be used to pay student debt, including for siblings. The $10,000 is a lifetime limit, not an annual amount.
Not surprisingly, the most unpopular part of the bill (based on early reactions) is the change in the stretch provisions. Already, tax experts and financial advisors are developing workarounds and adaptions. We'll explore some of those ideas in the February issue of the SMI newsletter.