The Setting Every Community Up for Retirement Enhancement (“SECURE”) Act and Coronavirus Aid, Relief, and Economic Security (“CARES”) Act have brought about changes that affect your retirement plans and retirement planning options. Many of these changes are positive developments for individuals saving for retirement or looking to access their retirement plans during this financial crisis. Other changes negatively affect our estate planning clients with large IRAs and other retirement plans who were hoping to have their children or grandchildren defer taking distributions from inherited retirement assets over the child or grandchild’s lifetime.
Required Minimum Distributions
Nobody will be required to take a Required Minimum Distribution (“RMD”) in 2020, regardless of your age or the type of retirement account you may have. Of course, if your want to continue to take distributions from your retirement plan in 202 you can do so. But there is no minimum amount you must take out. Owners of retirement plans that are invested in the stock market and who do not need the extra funds in 2020 might be wise to forgo a distribution in 2020, thereby leaving the assets in the account to hopefully grow in value if the stock market recovers later in 2020 or in 2021.
Also remember that the SECURE Act now pushes back the date that you must start taking RMDs from age 70 ½ to age 72.
Penalties for Withdrawal
If you have to take a distribution from your retirement plan in 2020, you can withdraw up to $100,000 without any penalty. The is true even if you have not reached age 59 ½, which is the normal age you have to attain to take withdrawals from your IRA or 401K without penalty. Of course, you would still have to pay federal and state income taxes on the taxable portion of any distributions you take from your retirement plan. If your current financial circumstances require you to withdraw money from your retirement savings and you are under age 59 ½, rest assured that at least you will not be subject to the 10% premature withdrawal penalty. Before making any withdrawals, consult with your tax or financial advisor to see if your State has also waived any premature withdrawal penalties made during 2020.
If you have a COVID-19 related reason (and those are fairly broad), you can borrow up to $100,000 from your IRA, 401K, or other retirement account. This option is available for any loans taken out from March 27, 2020 through September 23, 2020. You will still be required to repay the loan within five years, but no payments are required during 2020. The CARES Act allows borrowers to forgo repayment during 2020, and starts the five-year repayment clock in 2021, giving borrowers an extra year to repay their loans. The loan will, however, continue to accrue interest in 2020. But remember, the interest and principal payment you make to repay the loan to your retirement plan is essentially a payment to yourself.
More Time to Contribute
Because the date for filing and paying your personal income taxes has been extended to July 15, 2020, the deadline for contributing to your Roth or traditional IRA has also been extended. So if you have the funds available to contribute to a retirement plan and you haven’t made a contribution for 2019 as of yet, you have until July 15 to do so. If you are fortunate enough to be able to do so, consider contributing for both 2019 and 2020. Contribution limits for 2019 and 2020 are $6000 for individuals under age 50 and $7,000 for individuals 50 years old or older.
Also, the SECURE Act eliminated the requirement that you had to be under age 70 ½ in order to contribute to an IRA. Now any person of any age who can demonstrate that he or she had earned income can contribute to an IRA. This ability to contribute to IRAs after age 70 ½ may lead to more opportunities to make backdoor Roth IRA contributions.
SECURE Act Impacts “Stretch IRA” Planning
Many of our clients have created IRA Trusts or incorporated special provisions into their revocable living trusts to provide for children or grandchildren to receive IRA distributions over the child’s or grandchild’s life expectancy, otherwise known as “Stretch IRA Planning.” This type of planning has been greatly restricted under the SECURE Act. For IRA owners who died after December 31, 2019, most beneficiaries will only be able defer distributions from the “Inherited IRA” for a maximum of ten years. One piece of good news there is that there are no mandatory distributions that need to be taken during the ten-year deferral period – which creates many planning opportunities. Exceptions to the new ten-year requirement are distributions to spouses, minors, disabled individuals, and persons who are chronically ill. So all the planning we have done for us special needs clients through the use of Special Needs Trusts remains largely unaffected by the new law.
If you have a large IRA, 401K or other retirement plan, you should schedule an appointment to meet with Dennis Sandoval to discuss your planning options. This is true whether you have done an IRA Trust with us, you did one with another estate planning attorney, or you have not done any estate planning relating to your retirement plan in the past. Call us at 951-787-7711 to schedule your free initial consultation.
Time of Crisis Often Create Moments of Opportunity
The plunge in the stock market has created a new opportunity for persons with large retirement plans to consider a Roth IRA conversion. The SECURE Act has dramatically affected all aspects of estate planning for large retirement funds, but it has also spawned new and creative planning opportunities. The changes brought about by the COVID-19 pandemic have created opportunities with withdraw funds or contribute more to your retirement plan. Call us at 951-787-7711 to learn more.