Planning for Retirement: Just When You thought You Knew the Rules!

Margaret Amsden

As 2019 winds to a close, Congress gets busy and passes a law that changes much of what we all thought we knew about planning for retirement, and how Individual Retirement Accounts (IRAs) and 401k Plans work.  The change is occurring as a result of the Setting Every Community Up for Retirement Enhancement (SECURE) Act which has been kicked around for most of the year, but ended up being passed as part of the year-end appropriations bill.  The bill was signed by the President on December 20, 2019.

While the Act has a myriad of provisions, there are a few that will impact how we all think about retirement planning.

Individual Retirement Accounts

• The SECURE Act changes the starting date for Required Minimum Distributions (RMD) from 70 ½ to 72. This rule started as a way to assure that people, eventually, spent their savings and it did not grow untaxed forever.  However, the age was set in the 1960s and has never been adjusted.  As individuals live longer, it makes sense to increase the age that distributions start.
• The SECURE Act also removes age 70 ½ as the date individuals are required to stop contributing to their IRAs. Individuals can now contribute to their IRA at any age as long as they have earned income.  This addresses situations where people are working later into life, and may want to continue to defer a portion of the income for retirement.
• The SECURE Act shortens the time that a beneficiary has to withdraw money from an IRA. Historically, when someone died, the individual inheriting the IRA was able to withdraw the money over their life expectancy.  This meant that if someone passed, and named as their beneficiary someone much younger (such as a grandchild), the distribution period would be stretched over a long period of time.  This has now changed if the beneficiary is someone other than the decedent’s spouse.  Generally, the rule is that the beneficiary must now draw the funds over a 10-year period.

401(k) Plans

• Historically, employers did not have to include part-time employees who work less than 1,000 hours per year in the company’s 401(k) plan. However, it was recognized that since women are more likely than men to work part-time, due to taking time to raise a family or care for elderly relatives, these rules can be quite punitive when women are saving for retirement. The SECURE Act will now require employers maintaining a 401(k) plan to have a dual eligibility requirement under which an employee must complete either a one year of service requirement (with the 1,000-hour rule) or three consecutive years of service where the employee completes at least 500 hours of service.
• Other changes in the 401(k) area include permitting plans to adopt qualified distributions for the birth or adoption of a child, encouraging small employers to adopt automatic enrollment provisions by providing certain credits to the employer, and other modifications intended to simplify the safe harbor rules.

As mentioned, the SECURE Act contains over 25 individual changes in the IRA and qualified Plan area –and these are just a few of the more significant changes.  If you would like to learn more about how you or your company plan may be impacted, contact Clayton & McKervey.