How a new law changes retirement planning

The new retirement law that passed Congress in December is good for some people, but not for everybody.  Parts of it may please you.  And parts may dismay you. If you stand to inherit sizeable assets from qualified retirement accounts (like IRAs and 401k plans), you likely won’t be happy.  

Probably the most significant part of the Secure Act (“Setting Every Community Up for Retirement Enhancement”) – at least to many of our clients – is how it has changed the way future beneficiaries will receive money from inherited retirement accounts. 
Under the new rules, starting January 1st, new, non-spouse beneficiaries must withdraw all the money out of those accounts within 10 years – instead of stretching out withdrawals over their lifetime, as previously allowed under the “stretch” IRA.  While there are no required minimum distributions, by the time year 10 rolls around, your account balance must be zero.  This could have significant ramifications if your inherited account is substantial.
Ditching the stretch IRA is actually a double whammy.  First, large withdrawals could mean a whopping tax bill for inheritors, especially if you’re taking money out during peak earning years.  Second, the 10-year rule would limit the time your account has to grow.  Bad news if you’re a long-term investor.
Keep in mind that, since the 10-year rule took effect on January 1, 2020, accounts of benefactors who died by December 31, 2019 will not be affected.


Here are 7  ‘mostly good’  things the law does

1.  It increases required minimum distribution age from 70.5 to 72.  This gives you 18 more months to let your account grow before you must take money out.  (Those who turned 70.5 in 2019 will still need to withdraw their RMD this year – or suffer a 50% penalty!)


2.  It eliminates maximum age limit to contribute to traditional individual retirement accounts.  As long as you are working and earning income, you can now contribute to a traditional IRA – into your 70s and beyond. This is a plus for the many Americans who are working longer, due to increased life expectancy and the need to work later to fund longer retirements.  (Currently there are no age-based restrictions on contributions to a Roth IRA.)


3.  It gets rid of stretch IRAs.  Like we said, beneficiaries of inherited IRAs must now empty their accounts within 10 years.  There are, however, a few exceptions.  As an inheritor, if you are the spouse of the deceased, disabled or chronically ill, a minor (until the age of majority – usually 18) or no more than 10 years younger than the deceased, you are exempt from the new restriction.


4.  It encourages small businesses to offer retirement plans.  Not all workers have access to retirement plans, especially if they work for a small business.  This law makes it easier for small businesses to provide retirement plans by allowing unrelated companies to band together to create multi-employer plans, which lessens both the cost and concern over fiduciary liability.  The law also offers a tax credit to small businesses that start up a retirement savings plan and a tax credit to set up auto enrollment – a proven way to increase the number of workers joining a plan.


5.  It increases access to retirement plans for long-term part-time workers.  Under the Secure Act, employees who have clocked either 1,000 hours during one year OR at least 500 hours during three consecutive years (and are 21 years old at the end of the three years) are eligible to join a retirement plan.  Previously, the eligibility threshold for part-time workers was 1,000 hours worked per year.


6.  It makes it easier for employers to offer annuities in 401(k) plans.  By providing safe-harbor language that takes employers off the hook if their insurance products run into trouble, the Secure Act opens the door to all sorts of annuities being offered in 401ks. While this allowance is a definite boon to the insurance industry, it may or may not be beneficial to plan recipients.


7.  It allows penalty-free withdrawals for birth or adoption of child.  New parents with a retirement account will now be able to take out up to $5,000 without having to pay a 10% early-withdrawal penalty. Just remember, there will still be taxes to pay on that withdrawal at tax time.


For better or for worse, the Secure Act will change retirement planning for American workers.

Advisory services are offered by Joslin Capital Advisors, LLC, an SEC Registered Investment Advisor.

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