Big Changes Coming to Retirement Accounts Under New Law

Big changes are coming to how you save for retirement — and how you spend those savings during your golden years.

The Secure Act, which was signed into law on Dec. 20, revised a few key rules governing retirement accounts, with these changes starting in 2020.

Specifically, this legislation — officially known as the Setting Every Community Up for Retirement Enhancement Act of 2019:

• Repeals the maximum age for contributing to traditional individual retirement accounts (IRAs). Currently, that ceiling is the year you reach age 70½. This change will apply to contributions made for tax years after Dec. 31 2019.
• Raises the age by which you must start withdrawing required minimum distributions (RMDs), which apply to most types of retirement accounts. That threshold will change from the year you reach age 70½ to the year you reach 72. This change will apply to distributions that are required to be made after Dec. 31, 2019, and to people who reach age 70½ after that date.
• Requires employers to let long-term, part-time employees participate in employer-sponsored retirement plans. This change generally will apply to plan years that start after Dec. 31, 2020.
• Allows small businesses to join together to offer retirement plans.

These changes potentially benefit millions of workers struggling to save for retirement — and millions more who want to give their money more time to grow before they are forced to withdraw it from accounts.

Other changes in the Secure Act include:

• Expanding 529 college savings plans, including by allowing money from 529 accounts to be used to pay down student loan debt of up to $10,000.
• Permitting workers with 401(k) plans to withdraw up to $5,000 without penalty to cover the cost of having or adopting a baby.

The House first passed the Secure Act in May, but the bill then stalled in the Senate. The Secure Act made it through both chambers of Congress this month because it was included in a package of spending bills that fund the federal government for fiscal year 2020.

That package is what President Donald Trump signed on Dec. 20, which was also the funding deadline for the 2020 fiscal year.

End of the ‘stretch IRA’

The Secure Act’s changes come with a price. To fund them, the rules governing inherited retirement accounts will change.

CNBC explains:

“Instead of being able to take required withdrawals over the course of their life as they can now, most non-spouse beneficiaries would need to withdraw the money within 10 years of the original account owner’s death.”

In effect, the Secure Act will end the so-called “stretch IRA” strategy.

Previously, those who inherited retirement money from accounts such as an IRA sometimes used a strategy of withdrawing as little as possible each year so they could “stretch” the benefit of their inherited IRA over a long period — perhaps even a lifetime.

The goal was to limit distributions in the short term so that earnings could continue to compound over the long haul.

The change that will eliminate this strategy should provide more revenue for the government. In fact, it is estimated that it will provide $15.7 billion over 10 years in additional tax revenue, CNBC reports.

The change to inherited retirement accounts will affect non-spouse beneficiaries of accounts whose owners die after Dec. 31, 2019.