New Rules: How the SECURE and CARES Acts Change Your Retirement

The devastation caused by COVID-19 has overshadowed two important pieces of legislation that can affect your retirement. Here is a “cheat sheet” so that you can understand the key points that may relate to your situation. As is often the case with congressional law, the details can be complicated, so you should consult a professional advisor.

The SECURE (Setting Every Community Up for Retirement Enhancement) Act is a far-reaching law that is aimed at increasing access to retirement accounts and preventing Americans from outliving their assets.

The CARES (Coronavirus Aid, Relief, and Economic Security) Act is a law intended to address the economic fallout caused by the COVID-19 pandemic.

The SECURE Act

  • No Age Limit: The restriction on making traditional IRA contributions after age 70.5 has been eliminated. It also allows older workers to use the backdoor Roth IRA conversion strategy if appropriate – check with your advisor.
  • RMD Age Now 72: If you do not need the cash, you can wait until 72 to take a Required Minimum Distribution (RMD) from your retirement accounts. This extension effectively expands the window of time when tax rates are typically low and provides an opportunity for distribution planning.
  • QCDs Remain: The Act has maintained age 70.5 or older for Qualified Charitable Distributions (QCDs) from your IRA account, which can provide a tax break. Consult a financial or tax professional to help you navigate the complexities if you also want to make an IRA contribution.
  • 10% Penalty Exception: An exception has been created that waives the 10% penalty for drawing up to $5,000 from your personal or employer retirement plan. Remember that the withdrawal is still taxable.
  • 529 Plans Expanded: 529 education savings accounts now cover apprenticeships and a portion of student loan repayment. The Act also expands “compensation” to include taxable fellowships and graduate student stipends enabling these students to make IRA contributions based on this income.
  • More Annuities: The SECURE Act makes it easier for employers to include annuity offerings in their retirement plans.
  • No Stretch IRA: Instead of the ability of other-than-spouse beneficiaries to stretch IRA distributions over their own lifetime, a 10-year rule has been instituted. There are no annual Required Minimum Distributions, but you must deplete the account by the end of the 10th year following the death of the original owner. There are exceptions: surviving spouses, minor children, the ill or disabled, and beneficiaries less than ten years younger are exempt. The 10-year rule is tricky even as it pertains to these Eligible Designated Beneficiaries (EDBs), so be sure you get help on the details.
  • Estate Planning: The elimination of the Stretch IRA affects trusts. A review by your advisor and/or an attorney may be in order as your current trust may no longer meet your estate planning needs.

The CARES Act

  • No 2020 RMD: Required Minimum Distributions for IRAs, inherited traditional and Roth IRAs, and employer retirement plans have been waived this year. If you have already taken your RMD, check with a financial advisor to see if you can roll the money back or convert it to a Roth IRA.
  • Coronavirus-Related Distributions: Tax relief on up to $100,000 in distributions from retirement plans is available to those who have the virus, have a spouse or dependent who is ill, and/or have been unable to work. Coronavirus-Related Distributions (CRD) include the elimination of the 10% early withdrawal penalty, the ability to spread tax payments over three years, and an extended three-year period to repay the retirement plan. If the CRD is repaid, distribution taxes can be refunded by filing an amended tax return(s).
  • Retirement Plan Loans: If your employer allows it, it is possible to take both a retirement plan loan and a Coronavirus-Related Distribution. The two provisions are 1) a loan of the lesser of $100,000 or 100% of the account balance, and 2) an additional year to repay the loan. You may need a professional to determine the best course of action.

Both of these historic laws provide taxpayers with financial planning opportunities. There may be more on the horizon with the anticipated HEROES Act later this summer. A financial professional can help you create the best strategy to reach your goals.