Changes to Retirement Savings Plans

New Law Makes Big Changes to Retirement Savings Plans

​President Trump has signed landmark legislation that will make the largest changes to the U.S. retirement system in years.

The new Setting Every Community Up for Retirement Enhancement (SECURE) Act makes sweeping changes on rules governing individual retirement accounts and employer-sponsored 401(k) plans. They affect not only people enrolled in 401(k)s and IRAs, but also small firms that want to offer 401(k)s to their staff.

Most of the changes the law ushers in apply to the 2020 tax year and beyond, unless noted below. Here are some of the main changes:

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IRA required minimum distribution age now 72

The SECURE Act raises the age that retirees are required to start making mandatory withdrawals from an IRA or 401(k) plan to 72, from 70 and a half. Starting in 2020, the new law pushes out the Required Minimum Distribution (RMD) start date for most situations until age 72.

By pushing back the RMD start date, the SECURE Act gives you additional time to allow your IRAs and 401(k)s to grow without being depleted by distributions and taxes.

This change only applies to those who turn 70 1/2 after Dec. 31, 2019. So, if you turned 70 1/2 in 2019 or earlier, you're unaffected.

The change is also good news for anybody who is holding a traditional IRA and is considering converting it to a Roth IRA. The law gives them until the age of 72 to do this, as well.

With a Roth IRA, unlike a traditional IRA, withdrawals are tax-free as long as you meet certain requirements and there are no RMDs during your lifetime. The general goal of a Roth conversion is to convert taxable money in an IRA into a Roth IRA at lower tax rates today than you expect to pay in the future.

Conversion to guaranteed income vehicle 

The SECURE Act will also allow employers to set up retirement savings plans that enable employees to convert their savings into guaranteed lifetime income, through annuities.

The law includes a safe-harbor provision that shields employers against lawsuits if the insurer they choose to make annuity payments doesn't pay claims in the future.

These products will likely not be available until regulations are written enabling them. So, they may not hit the market until late 2020 or 2021.

Small employer options

It's always been difficult for small employers to offer the same types of 401(k) plans as large companies, since they do not have the economies of scale. The cost is often prohibitive.

The SECURE Act paves the way for small firms to form groups to offer multiple employer plans (MEPs). These plans allow them to form a plan that can attain its own economies of scale for the participants. MEPs are currently allowed, but only for businesses with a relationship such as a common owner.

The MEP provision does not take effect until 2021. There may also have to be some rulemaking before it comes into effect.

Part-timers can save too

The SECURE Act also changes the law to allow part-time workers to be eligible to participate in employer 401(k) plans. Under new rules, employees who work more than 500 hours a year for three consecutive years can become eligible to participate in the company plan.

IRA age contribution cap lifted

For tax years beginning after 2019, the Secure Act repeals the age restriction on contributions to traditional IRAs. Prior to 2020, once you turned 70 ½ you were ineligible from making any more contributions to your traditional IRA (the lack of age restriction for Roth IRAs is unaffected and remains in place).
Under the new law, for tax years beginning in 2020 and beyond, you can indefinitely make contributions after reaching age 70 ½.

This law change means a couple over 70 ½ will be allowed to contribute more than $14,000 combined to an IRA in 2020 if both spouses are contributing the maximum of $7,000 a year.

Stretch provisions eliminated

The Secure Act requires most non-spouse IRA and retirement plan beneficiaries to drain inherited accounts within 10 years after the account owner's death, or face tax obligations.

Under provisions that were in effect until the end of 2019, if a traditional IRA was left to a beneficiary, that person could stretch out the RMDs over their own life expectancy, essentially "stretching" out the tax benefits of the retirement account.

The new law exempts surviving spouses, minor children and those not more than 10 years younger than the deceased from the new 10-year provisions.