How the SECURE and CARES Acts Affect Retirement Planning

The SECURE Act and CARES Act

Financial planning for retirement? What you need to know.

The Setting Every Community Up for Retirement Enhancement Act, otherwise known as the SECURE Act, was signed into law on Dec. 20, 2019. It was the first significant retirement-related legislation enacted since the 2006 Pension Protection Act. Since then, the coronavirus pandemic led to even more changes being enacted through the Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed in late March.

Elements of both acts will affect your retirement planning and how you use the funds over time. In general, most of the changes are taxpayer-friendly, helping increase access to retirement accounts and preventing older Americans from outliving their assets.

Key Changes that Might Affect Your Retirement Planning

The SECURE Act

The SECURE Act and its changes became effective Jan. 1, 2020. A few areas may directly impact your financial planning for retirement:

Required Minimum Distributions Start at age 72

Required minimum distributions (RMDs) can be a pest, as you may not want to start taking money out of retirement funds when you really don’t want to. Fortunately, if you find them irritating, RMDs will begin at age 72, not 70 1/2 as before. (RMDs are mandatory withdrawals from traditional IRAs and employer-tax deferred accounts, like 401(k)s, 403(b)s, and 457s.)

Take note of specific dates: if you were born before July 1, 1949 (turned age 70 1/2 in 2019), you’ll still need to take your RMD for 2019 by April 1, 2020. If you’re currently receiving RMDs because of your age, you must continue taking them. Only those who will turn 70 1/2 in 2020 or later can wait until age 72 to begin taking mandatory distributions.

How the CARES Act has changed this for 2020: RMDs have been suspended for 2020. This gives more flexibility to those who may be facing financial difficulties, and gives retirement accounts a chance to recover from this spring’s volatility. This suspension applies to 2019 RMDs that were due April 1, 2020, as well as all 2020 RMDs.

IRA Contributions Allowed after age 70 1/2

If you want to work into your 70s and still want to put money away for your retirement, there’s great news. As of the start of 2020, you can contribute to your traditional IRA in the year you turn 70 1/2 (and going forward), provided you have earned income. You still can’t make prior-year traditional IRA contributions if you’re over 70 1/2. And, depending on your income, you could contribute to a Roth IRA, which has no age restrictions.

Penalty-free Withdrawals for Adoption or Birth Expenses

If you have a new baby on the way or are about to adopt – congratulations! But, you may be beginning to fret about how you’re going to pay for birthing or adoption costs. The new rule allows each parent to take out a lifetime maximum of $5,000 from his/her retirement accounts, which means a couple could take out up to $10,000 penalty-free if they each had separate accounts. While parents may repay all or part of the withdrawal amount, it’s not required.

Inherited Retirement Accounts

Now for some bad news: upon the account owner’s death, non-spouse individual beneficiaries must receive distributions within 10 years. The previous rule allowed a non-spouse IRA beneficiary to “stretch” RMDs over their lifetime, keeping it tax-deferred and letting it grow for decades. With the SECURE Act, this law has been eliminated, which applies to 401(k) accounts or other defined contribution plans.

There are exceptions, though. Spouses, disabled or chronically ill individuals, and minor children are omitted from this new rule. If you were already taking distributions from an inherited IRA, you could continue under a stretch IRA.

The CARES Act

Early Withdrawal of Retirement Funds

If you need to take an early withdrawal from your retirement accounts due to coronavirus hardship, the 10% penalty will be waived on distributions up to $100,000. This is retroactive to January 1. It’s important to note that withdrawals will be taxed; however, that tax is spread over three years.

To qualify for early withdrawal without penalty, you must have been diagnosed or tested positive for Covid-19 or SARS-CoV-2; have a spouse or dependent who was diagnosed with either of those diseases; or experienced financial hardship due to being quarantined, laid off, furloughed or having work hours reduced.

401(k) Loans

If you have a 401(k) account, you have always been able to borrow against it—either at 50% or $50,000, whichever is less. The CARES Act expanded this loan option to 100% of your account balance or $100,000, whichever is less. If you already have taken out a loan against your 401(k), payments are suspended in 2020.

Retirement Planning: Next Steps

Planning for retirement nest egg If you have questions or need more information about the SECURE Act or the CARES Act, talk to your financial advisor or tax professional about maximizing your tax bracket, looking at Roth conversions, and assessing trust tax rates.

In the meantime, consider re-evaluating beneficiaries, as spousal rollovers can be beneficial for tax deferral. And, if you listed a trust as a beneficiary, review its implications.

Financial Planning for Retirement Made Easy

Greater Alliance Federal Credit Union is committed to your financial well-being. We have several IRA options to help you with retirement planning:

Traditional IRA – With Traditional IRAs, you don’t pay taxes on your contributions until you withdraw the funds. If you continue to work and have earned income, you may continue to save for retirement, regardless of your age under the new SECURE Act.
Roth IRA – With a Roth IRA, you pay taxes now and withdraw the funds tax-free when you retire. Contributions can be made after the age of 70 1/2 without any RMDs if you have earned income.
Coverdell Education Savings Account (ESA) – This is a custodial account designed to help families save money to pay for a child’s education expenses from kindergarten through college. Like a Roth IRA, contributions are made to a Coverdell ESA on an after-tax basis, so you don’t get a tax deduction for the money you deposit.