The most significant changes to retirement accounts and 529 plans in years are set to take place in 2020. The SECURE Act was made law by Congress and the President last week. In addition, the retirement contribution limits have changed modestly for 2020.
|Retirement Account Limits||2020||2019|
|Elective Deferrals 401(k) / 403(b)||$19,500||$19,000|
|Catch-up Contributions for those age 50+||$6,500||$6,000|
|Defined Contribution Limits||$57,000||$56,000|
|IRA/Roth IRA Contributions||$6,000||$6,000|
|IRA/Roth IRA Catch-Up Contributions||$1,000||$1,000|
|SIMPLE Maximum Contributions||$13,500||$13,000|
|SIMPLE Catch-up Contributions for those age 50+||$3,000||$3,000|
The SECURE Act will affect everyone with a retirement account or company retirement plan. However, some account holders will be more affected than others depending on age and beneficiary. While we have highlighted many of the changes below, we recommend consulting with your advisor to learn the new law’s impact on your financial plan.
Increased Required Minimum Distribution Age (RMD)
Currently IRAs and company retirement plans require mandatory withdrawals annually starting at age 70.5. Effective in 2020, the new starting age is 72.
Removal of IRA Contribution Age Limit
Under current law, those workers over age 70.5 are no longer able to contribute to a Traditional IRA. The SECURE Act removes this age limitation starting in 2020.
Disallow Beneficiaries to “Stretch” Lifetime Distributions
Beneficiaries of IRAs, Roth IRAs, and company retirement plans will no longer be allowed to “stretch” distributions over their lifetimes. There will be no required distribution and the entire account balance will need to be withdrawn in 10 years after the original account holder’s death. Exceptions include: those inheriting retirement accounts 2019 and prior (will continue stretch distributions), 2) surviving spouses, 3) disabled 4) chronically ill 5) not more than 10 years younger than owner, and 6) minor children. As stated by the author of the below Forbes article:
“The tax burdens of faster distributions of inherited retirement accounts will increase the need for proper estate planning and potentially more strategic Roth conversions during the life of the account owner, adding additional complexity to retirement and estate planning.”
Penalty-free Distributions for Birth of Child or Adoption
A total amount of $5,000 may be distributed from a retirement plan without the 10 percent penalty in the event of a qualified birth or adoption. The distribution would need to occur within one year of the adoption becoming final or the child being born.
529 Plan Distributions for Student Loans
Up to $10,000 can be distributed from 529 college savings plans and used to pay off student loans. The $10,000 is a lifetime amount, and NOT an annual limit.
For other changes, the articles below summarize initial thoughts on the new law.