Federal legislation that went into effect at the beginning of the year gives retirees more time to add to their Individual Retirement Accounts (IRA) and 401(K)s, but there’s a caveat to the good news.
President Donald Trump signed the SECURE Act, i.e., the Setting Every Community Up for Retirement Enhancement Act of 2019, last December, and among its offerings, is a facet of the new law that gives individuals who are saving for retirement another 1 ½ years to save money in their accounts.
But it also includes a stipulation requiring beneficiaries of the accounts to take all their required minimum distributions by the end of the 10th calendar year after the account owner’s death.
Spouses of an account owner may still take advantage of the “Stretch IRA” provision that, under the old rules, allowed beneficiaries to “stretch” taxable distributions over his or her lifetime, notes a press release from Edward Jones, a financial services firm that has offices in Hopkinsville.
But most non-spouse beneficiaries will have to take all the distributions by the end of the 10th year.
Consequently, officials note that non-spouse beneficiaries who inherit an IRA or other retirement plan could have tax implications due to the need to take larger distributions in a shorter time frame.
“It’s kind of a trade-off,” explains Robbie Sipes, a financial advisor with Edward Jones in Hopkinsville, noting that, while retirees get to keep their money for 1 ½ more years, their beneficiaries have to take all the money within 10 years of the owner’s death.
“For those that pass on an inheritance via an IRA, it will drastically change the ways we pass on inheritance,” Sipes observes of the law’s impact.
In the past, individuals were leaving as much of their money in IRAs for as long as they could.
But with the changes in the law, Sipes notes that they may choose to drain down their IRAs and, leave other monies for their beneficiaries, i.e., monies on which the taxes have already been paid.
He advises individuals with an IRA or 401(K) to make sure they “touch base with someone” and make changes to their accounts if needed.
The SECURE Act, as it is familiarly known, pushes the age for starting the withdrawals known as required minimum distributions from 70 ½ to 72 for traditional IRAs, 401(K) accounts or other employee-sponsored plans, essentially allowing account owners to hold onto their accounts a while longer.
“It gives you an extra year to add to an IRA or 401(K) or even if you’re not adding, just to hold them,” Sipes notes of what he describes as one of the biggest changes to come from the law. “The longer you can push that off, the longer your money can grow in that tax-deferred account.”
He observes that the new SECURE Act will impact many people in the community. At a time when pensions are a thing of the past, most people have their savings in a 401(K), 403(b) or IRA retirement plan.
“In our grandparents’ and great-grandparents’ time, everybody had a pension and Social Security,” Sipes notes. “Now pensions have gone away.”
The law also allows account owners to fund their traditional IRAs as long as they have taxable earned income and gives new parents the opportunity to withdraw funds early without being penalized.
A press release from Edward Jones notes that parents can withdraw up to $5,000 from their retirement plan without paying the 10% early withdrawal penalty account owners must typically pay if they withdraw funds before age 59 ½ .
Parents must withdraw the funds within a year of a child being born or an adoption becoming final.
Additionally, other facets of the law that primarily affect business owners allow tax credits for some smaller employers who set up automatic enrollment in their tax plans and make it easier for employers to consider including annuities as an investment option within their 401(K) plans.
Edward Jones, according to the press release, calls the new law the most significant change to the retirement savings system in more than a decade.
To see the full press release, visit edwardjones.com/financial-focus/investment-topics/look-for-changes -in-retirement-plans.html.
Reach Tonya S. Grace at 270-887-3240 or email@example.com.