The law raises to 72 from 70½ the age at which individuals must begin taking RMDs from their retirement accounts. Important: The new law only applies to people who turn 70½ after December 31, 2019. If a person turned 70½ in 2019, the law does not apply—that person must take an RMD in 2019, 2020 and beyond.
The law ends the prohibition on contributing to an individual retirement account (IRA) after 70½. Individuals may continue contributing to an IRA at any age, as long as they have earned income.
Under current law, inherited retirement accounts (often referred to as “Stretch IRAs”) can distribute those assets over the beneficiary’s lifetime. Under the new law, those assets must be distributed within 10 years. This provision has potentially significant estate planning implications. There are exceptions for spouses, minor children, disabled individuals and people less than 10 years younger than the decedent. The bill does not affect existing inherited accounts. It only applies to accounts that are inherited in 2020 and beyond.
New parents can withdraw up to $5,000 from an IRA or an employer-sponsored retirement plan to pay for birth and/or adoption expenses, through the first year after the birth or adoption. Taxes still need to be paid on pre-tax contributions, but no penalties apply to the withdrawal.
Employees must have worked at least 500 hours a year for three consecutive years in order to be eligible.
The bill requires the Department of Labor to propose rules for a new disclosure to plan participants that will illustrate the participant’s projected monthly income in retirement based on current retirement assets. It’s designed as a kind a “progress report” to show employees how they are doing on saving. The rule-making process for this is likely to take a year or more, followed by an implementation period, so it could be 2021 or 2022 before this becomes standard.
The new law lowers barriers to offering annuities in employer-sponsored plans, though plans are not required to do so.
Assets in these college-savings plans can now be used to repay up to $10,000 in student loans.
Several provisions in the bill are designed to make it easier for small businesses to offer retirement plans to their employees, including a provision that will allow unrelated small businesses to band together in so-called “multiple employers plans” to offer a plan to employees.
Investors who have turned or will turn 70½ before December 31, 2019, should ensure that they have taken their RMD or have plans to do so prior to the deadline of April 1, 2020. If you turn 70½ on or after January 1, 2020, you will not need to begin taking required minimum distributions until 2022.
Investors who have estate plans that include leaving retirement accounts to heirs should consider reviewing those plans with a financial planner to determine whether any changes need to be made based on the new law.
Investors over 70½ who have earned income should consider discussing with a financial planner whether the new rule permitting ongoing contributions to an IRA makes sense for their situation.
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