Uncle Sam Makes Retirement Planning, Saving Easier With 6 Key Reforms
Anyone looking for ways to better their retirement planning has now caught a break. The newly enacted $1.4 trillion government spending package includes liberalizing several key rules governing retirement accounts. Most will make saving for your retirement easier.
Among the changes: new rules that will encourage the use of annuities in 401(k) and similar plans, as well as let workers keep savings inside tax-sheltered IRAs longer.
One of the few negatives in the new rules is a change that will almost totally kill so-called "stretch IRAs," a popular tax-planning strategy involving inherited retirement accounts. Yet even that change contains a legal loophole that will help some savers.
And the list of positive new rules continues with a provision that will make it easier for small businesses to offer 401(k) accounts to their workers.
The retirement planning provisions are mainly contained in the portion of the package called the Secure Act, which stands for Setting Every Community Up for Retirement Enhancement.
The Investment Company Institute (ICI), a group that represents the mutual fund industry, applauded the Secure Act, saying it "delivers major wins for American savers."
Here are some of the main features of the retirement planning rule changes, which are due to take effect Jan. 1, now that Pres. Trump has signed the legislation:
Retirement Planning Provisions For Contributing To An IRA
The new rules no longer bar contributions to traditional IRAs after age 70-1/2. Under the new rules, you will be able to keep contributing after age 70-1/2 for as long as you are still working.
New Benefits For Spousal IRAs
The end of the ban on contributions to a traditional IRA after age 70-1/2 has a second retirement planning benefit. It will let a spouse who does not earn any or enough income to fund his or her own IRA continue putting money into that IRA (known as a spousal IRA) after age 70-1/2 so long as he or she has a working spouse who does earn money.
In addition, the spouses must file a joint return.
The spouse without any or enough income can only contribute up to the normal limit — whether it's the regular limit or the catch-up contribution limit — and only up to the amount earned by the working spouse, whichever is lower.
For a working spouse and nonworking spouse who are both 55 years old to each contribute $7,000 to their respective IRAs, for example, the working spouse must earn at least $14,000.
Starting Age For Required Minimum Distributions
You will no longer have to begin withdrawing money from a traditional IRA or a 401(k), whether it's a traditional or Roth style account, by April 1 of the year after you turn age 70-1/2. The new starting age is 72 for required minimum distributions (RMDs). "The half year part was baffling to a lot of people," said IRA expert Ed Slott, founder of IRAHelp.com. "So that feature is gone. Good riddance."
Most retirees already begin withdrawals earlier than the required age. They need the income sooner, Slott says. The new retirement planning rule will help the minority of savers who can afford to wait until the mandatory latest starting age.
Withdrawals from Roth IRAs are tax-free. A Roth IRA is also exempt from RMDs in any case. A Roth 401(k) account is not exempt from RMDs, but the withdrawals typically are tax-free.
The tables that determine the size of withdrawals are based on life expectancy. The 2020 tables themselves will not change under the new rules. Only the starting date changes.
With the later starting date for RMDs, the size of withdrawals will be larger because account owners will have slightly shorter life expectancies at the later age.
New Retirement Planning Rules For Stretch IRAs
The stretch IRA is not actually a type of IRA. Rather, it's a method for transferring wealth from one generation to another. "It's been a very popular strategy," Slott said. "But now it's dead for most people."
Until the end of 2019, the way a stretch IRA works is that the beneficiary you name inherits your IRA. The strategy lets the beneficiary "stretch" withdrawals from your IRA over several generations.
Young heirs typically are much younger than wealthy older benefactors, so young heirs' annual RMDs are usually much smaller than the older relative's RMDs would have been.
That lets the account balance remain protected from taxes inside the IRA much longer. But most beneficiaries who inherit after 2019 will have to empty their inherited IRAs within 10 years. Withdrawals from Roth IRAs will be tax-free.
Still, there is a faint silver lining: "If you die in 2019, the old rules are grandfathered in," Slott said. "Your heirs can keep using the old rules that exist right now, going forward. For them, the stretch IRA will still exist."
But Slott sees a problem in the fact that Congress changed the stretch IRA rules at all. "People made long-term plans believing they could rely on the tax laws at the time. This revision changes the rules in the ninth inning of the game and causes savers to lose faith in long-term tax planning," Slott said. "This could erode people's willingness to use tax-advantaged plans to save."
Immunity For Employers That Sponsor A 401(k) Plan
Looking for ways to arrange retirement income? Your retirement planning gets a boost from the new rules.
Employers who sponsor 401(k) plans get the immunity they have long sought from lawsuits by disgruntled employees who don't like an annuity they obtained through their plan.
From now on, disgruntled employees will only be able to sue the insurer, not their employer, if something goes wrong or they just don't like the annuity.
How does that help you, the little guy? This change will encourage 401(k) plans to offer annuities, filling a widely seen need for income tools in 401(k) plans.
Retirement Planning Made Easier For Small-Business Employees
The Secure Act makes it easier for small businesses to offer 401(k) plans.
The Act green lights multi-employer 401(k) plans (MEPs). A MEP is a plan run for the employees of two or more separate businesses. They're typically smaller businesses that can't afford to run their own plan.
Prior to the Secure Act, separate employers had to have something in common, like belonging to a certain trade association, to form an MEP. The Secure Act lets totally unrelated businesses form an MEP.