By Eric Hutchinson, Vice President, Goldman Sachs Personal Financial Management
It’s hard to believe that we’re already halfway through 2020 – a year that has been filled with much anxiety and uncertainty due to the outbreak of Covid-19. The pandemic has affected the way we work, spend time with our loved ones as well as how we think about the future – especially when it comes to our financial well-being.
Financial planning topics continue to dominate the headlines, and money concerns remain top of mind for many people. This isn’t at all surprising given that many are worried about their financial security and what the future may hold.
If you’ve been following some of the big financial headlines this year, you may be aware that there have been significant changes to U.S. retirement and tax laws in 2020 – the details of which can be hard to keep up with in the midst of a pandemic.
It’s important to keep up with these changes and understand how they may affect your financial plans. As we enter the second half of 2020, it’s a good time to do a quick check-in with your financial advisor and make sure you understand six key recent changes to retirement plans.
There are two important changes to the rules for required minimum distributions (RMDs) from retirement accounts. Let’s look at those in turn.
First, just before the start of 2020, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law. The SECURE Act included more than 20 provisions designed to preserve and expand retirement savings.
One major change affects the required minimum distribution rules for retirement accounts. The SECURE Act raised the RMD age to 72 from 70 ½ for individuals who turn 70 ½ after December 31, 2019. This means that if you were born on or after July 1, 1949, you don’t have to begin taking RMDs until you turn 72.
You may be wondering why this change matters. With the retirement age increasing for many Americans, this new rule allows you to defer taxable withdrawals (the RMDs) for a while longer. It essentially allows you to keep your retirement funds invested in the account for a while longer, giving it a little more time to work for you. When it comes to retirement savings, every little bit can help.
One important thing to always remember: Failure to take the correct RMD amount on time can lead to a costly penalty – as much as 50% of your required distribution!
That being said, the IRS has waived RMDs for 2020. Let’s take a closer look at this second change to RMD rules in the next section.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES Act”) Act was signed in to the law. The CARES Act included a provision that waives RMDs in the 2020 calendar year for individual retirement account (“IRA”) owners and participants in certain defined contribution plans. (This waiver also applies to an individual’s first RMD for 2019 that was previously required to be taken by April 1, 2020, if the individual deferred taking that RMD into 2020.)
Prior to the SECURE Act, you could not contribute to a traditional IRA after you turned 70 ½. Thanks to the new law, this maximum age limit for contributions has been eliminated. Starting in 2020, you can continue to make contributions as long as you’re working. This opens up opportunities for you to build up additional savings to help better secure your retirement future.
In addition, long-term part-time workers may be eligible to join their company’s 401(k) plan if they can meet certain work-hour requirements. If you work part-time and haven’t been eligible to participate in your company’s plan, consider asking your employer or HR department how and when you can enroll.
The SECURE Act also placed limits on the “stretch” IRA option – a major change that may likely affect many families and their estate planning strategies.
Prior to the new law, if you inherited a retirement account (e.g., IRA), you could potentially “stretch” the required distributions over your lifetime, which could help limit your overall tax exposure.
However, the SECURE Act has removed the stretch IRA option for specific beneficiaries. Effective January 1, 2020, the new law generally requires inherited accounts to be fully distributed within 10 years following the death of the original account holder. An exception to this rule is provided to “eligible designated beneficiaries” as defined by the IRS (e.g., surviving spouse, individuals with disabilities, minors, etc.).
Rules governing inherited retirement accounts are complex. If you have a retirement account that you’re planning on leaving behind to your children, consult with your tax and legal advisors who can help you understand this new rule and its implications. Changes under the SECURE Act might require you to re-evaluate your retirement and estate planning strategies.
To be fair, this one is not really retirement-related, but it’s still important to know.
529 education savings plans received a little upgrade from the SECURE Act as well. You may now be able to use the funds to repay qualified student loans (up to $10,000). For a more personalized discussion, talk to your financial advisor to learn how you may be able to use the funds to help your family tackle any outstanding student debt.
Many Americans are struggling financially due to the widespread economic hardships caused by the coronavirus. To help provide relief, the CARES Act has a provision that waives the 10% early withdrawal penalty for distributions from a qualified defined contribution plan or IRA, up to $100,000 in 2020, if the individual meets certain Covid-related eligibility requirements. These distributions can also be repaid over a 3-year period.
A word of caution: Not all employers may have elected to offer this withdrawal option in their 401(k) plans. And in order to make a qualified Covid-related withdrawal, you have to be able to show that you meet specified requirements about being adversely impacted by Covid-19. Before making such a withdrawal, it’s best to consult with your tax advisor and 401(k) plan administrator to see if this option is available to you.
For more information, please visit the IRS FAQs webpage.
Staying on top of your personal finances and keeping up with recent changes in our retirement laws can be challenging – especially when we’re all trying our best to adjust to a “new normal” in our daily life.
Navigating these changes and thinking about the decisions that may need to be made for your future can seem daunting. But it doesn’t have to be so.
A quick check-in with your financial advisor can give you an opportunity to discuss any questions or concerns you may have with an experienced professional who can work with you to help keep you on track to reach your financial goals.
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