In the blink of an eye, the playbook changed for many retirement savers in 2020.
The Setting Every Community Up for Retirement Enhancement, or Secure, Act—signed by President Trump on Dec. 20—brings the most sweeping changes to the U.S. retirement system in more than a decade. The new rules are aimed at increasing Americans’ access to work-based retirement plans and helping their savings last longer, with major changes to the offerings and availability of 401(k)s as well as to the timing of distributions from individual retirement accounts.
“Some of these provisions will be real game-changers for retirees,” says Charlie Nelson, chief executive of retirement and employee benefits for Voya Financial. “The Secure Act will advance coverage, provide greater access to lifetime income solutions and offer many other positive aspects that will benefit individuals saving in workplace retirement plans.”
Here are some key details of the Secure Act as well as a few other things to be aware of on the retirement front for 2020:
Retirement legislation
Among other things, the Secure Act extends the time when retirees need to start taking required minimum distributions from retirement accounts, pushing it back to age 72 from age 70½. For those who turned 70½ in 2019, the first RMD will have to be taken by April 1, 2020. But anyone who turns 70½ after Jan. 1, 2020, won’t have to take their RMD until they’re 72.
Another key provision relates to IRAs inherited by a non-spouse beneficiary, a common estate-planning strategy to stretch out IRA distributions. Beneficiaries of an IRA would need to draw down the account—and pay income tax on the money—over a decade, rather than a lifetime, with certain exceptions.
The measure also opens the door to annuities becoming a more common and accessible option for retirement-plan participants; removes the 70½ age limit on IRA contributions; and boosts the likelihood of small employers offering retirement plans with so-called open multiple employer plans.
Inflation adjustments
The Internal Revenue Service announced contribution-limit increases for certain retirement plans. The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan increases to $19,500 from $19,000. The catch-up contribution limit for employees aged 50 and over in these plans rises to $6,500 from $6,000.
The limit on Simple IRAs for 2020 increases to $13,500, up from $13,000 for 2019.
In addition, the income ranges for determining eligibility to make deductible contributions to traditional IRAs, Roth IRAs and to claim the Saver’s Credit all increased for 2020. For instance, the income phase-out range for married couples filing jointly who make contributions to a Roth IRA is $196,000 to $206,000, up from $193,000 to $203,000. Consumers can visit the IRS’s website for more information on the contribution changes.
Social Security and Supplemental Security Income benefits for nearly 69 million Americans will increase 1.6% in 2020 as part of the annual cost-of-living adjustment. This could be offset somewhat by an increase in Medicare premiums. The standard Part B premium, which most people will pay, is increasing to $144.60 a month, or more, depending on your income; the Part B deductible is increasing to $198 for 2020; and Part A premiums, deductibles, and co-insurance will also be higher in 2020, in addition to other changes that will affect certain retirees.
Election-year proposals
While it would be premature to take action, pre-retirees and retirees should be aware of proposals that could come to fruition depending on the election results.
For instance, part of Democratic presidential candidate Joe Biden’s tax plan includes eliminating a tax loophole that’s known as “step-up in basis.” Capital-gains taxes are typically paid on the difference between the initial purchase price of an asset and its appreciated value at the time of sale. The loophole, however, adjusts the cost basis of an inherited asset to the fair-market value on the date of inheritance, such that any capital gains paid on a future sale would be based on that value and not the original purchase price.
If a proposal like this were implemented, it could have a costly impact in cases where parents leave an appreciated asset (like a house) to their children, says Jere Doyle, an estate-planning strategist for BNY Mellon Wealth Management. Once the asset is passed on and sold, the children would be on the hook for potentially hefty capital-gains taxes, he notes.
This article was written by By Cheryl Winokur Munk from Barron’s on Dec. 29, 2019 and was legally used by AdvisorStream.
Featured articles are not written by Cornerstone Wealth as information was obtained from third-party sources, which we believe to be reliable, but not guaranteed. These articles are a matter of opinion and are for informational purposes only. Is it not intended to serve as investment advice and does not address or account for individual circumstances. Decisions should always be made based on the client’s specific financial needs, goals, objectives, time horizon and risk tolerance.
