Changes for Retirement Plans
By Peter Rizzo
The Staff at CheckBook IRA wishes all our clients and prospective clients a Merry Christmas and joyous Holiday Season. We have clients and prospects with many different religions and beliefs but the one common denominator is that they want to independently control their retirement investments. With Washington DC in a kerfuffle over the political events of the past month the passing of the last budget bill went completely unnoticed. Anne Tergesen wrote a great article in the Wall Street Journal December 20th 2019 on the changes coming for IRAs and 401ks – below is the article in full.
“The spending bill the Senate passed on Thursday includes a variety of changes for people with retirement accounts.
Here are answers to questions Wall Street Journal readers have raised about the retirement provisions of the bill, which President Trump is expected to sign into law, and its effect on 401(k) and individual retirement accounts.
Q: I turned 70½ in 2019 and am scheduled to take my first required distribution from my retirement account by April 1, 2020. Can I take advantage of the law’s increase in the age for starting required distributions to 72?
No. Only account owners who turn 70½ after Dec. 31, 2019, can start mandatory distributions at 72 years old.
Q: The new law allows parents to take penalty-free withdrawals from retirement accounts upon the birth or adoption of a child. How will this work?
After Dec. 31, 2019, parents can withdraw up to $5,000 from a retirement account within a year of a child’s birth or adoption. The law waives the 10% penalty owners younger than 59½ would normally owe. But they must pay income tax on the withdrawal.
“This should only be used as a last resort,” said Ed Slott, an IRA consultant in Rockville Centre, N.Y., who recommends taking advantage of a provision of the law that allows the money to be repaid. “To start withdrawing money from retirement savings kills off years of compounding.”
Q: What are the new rules for people who inherit IRAs or 401(k)s?
Currently, people who inherit Roth and traditional accounts can often stretch required withdrawals—and make associated tax payments—over their own lifetimes, a technique known as the “Stretch IRA.” The legislation would require those who inherit from people who die after Dec. 31, 2019, to take the money out and pay any taxes due within a decade.
The bill exempts some beneficiaries, including surviving spouses, who can still stretch the distributions—and tax payments—over their lifetimes.
Q: The new law makes it easier for employers to offer annuities in 401(k)s. But annuities often have high fees. Should I avoid them?
Annuities, which make it easier for retirees to convert their retirement savings into a steady lifetime income, can make sense for retirees unable to cover their basic living expenses with Social Security and other forms of guaranteed income, such as pensions, said Mr. Slott.
But annuities generally have higher fees than mutual funds do, and so they reduce workers’ returns by more.
Workers should benefit from their employers’ ability to obtain lower group prices on these contracts. United Technologies Corp. , a Farmington, Conn., company that builds products including aircraft engines, added a variable annuity with an income guarantee to its 401(k) plan in 2012. The price for the guarantee, which is available in the $29 billion plan’s target-date funds, is 1% a year. When investment and administrative fees are added, the total cost is about 1.18% a year, versus a typical total cost of over 3% for a comparable annuity in the individual market, according to Morningstar.
Q: What happens if my 401(k) offers an annuity and then drops it?
The law allows employees who invest in an annuity in a 401(k) that stops offering the annuity to transfer their contracts tax-free to an IRA, even if the employee would otherwise be prohibited from making withdrawals. Employees could continue contributing to the contract, up to $6,000 a year (or $7,000 for people 50 or older), on either a pretax or after-tax basis, depending on factors including the person’s income.
Q: The new law makes it easier for part-time workers to participate in 401(k) plans. Am I covered?
Starting in 2024, 401(k) plans will be required to allow part-time employees who have worked more than 500 hours a year for at least three consecutive years to contribute, said Mark Iwry, who oversaw national retirement policy while at the Treasury Department during the Clinton and Obama administrations and is now a nonresident senior fellow at the Brookings Institution. Employers won’t have to provide matching contributions for these workers.
Industries that could be disproportionately affected include the retail, leisure, education and health-services sectors, which employ significant numbers of part-time workers.
Q: The law requires 401(k)-type plans to estimate for participants how much lifetime income their balance might support. How will that calculation be made?
The legislation instructs the Labor Department to devise assumptions 401(k) plans can use to estimate the monthly income a worker’s 401(k) balance is likely to generate over his or her lifetime. The disclosure, which some plans already make on a voluntary basis, must be made on workers’ 401(k) statements a year after regulators finalize those assumptions, said Mr. Iwry.
It is unclear whether the Labor Department will encourage or require 401(k) plans to go beyond disclosing the monthly income a participant could purchase with his or her current account balance. To help participants better understand whether they are saving enough, the provision should be interpreted to require 401(k) plans to estimate the monthly income participants would receive at retirement age assuming they continue to save at their current rate, Mr. Iwry said.
Q: Who will be affected by the law’s repeal of the age cap, currently 70½, for making contributions to a traditional IRA?
The growing number of Americans age 70½ or older with wages, commissions, self-employment earnings or other forms of income will be helped. Nearly 20% of 70- to 74-year-olds are working today, up from 11% in 1992, according to the Bureau of Labor Statistics.
Their spouses can benefit too. Under an often-overlooked provision of the tax law, a nonworking person whose spouse earns income can also save up to $6,000 a year in an IRA (or $7,000 if they are 50 or older), said Mr. Slott.
The same rules apply to Roth IRAs. Although in 2020 Roth contributions are off limits for individuals earning more than $139,000 a year and couples earning more than $206,000 annually, older workers with paychecks above those thresholds can make nondeductible contributions to a traditional IRA and convert the money to a Roth. They will owe income tax on the traditional account’s appreciation. But if they convert the money before the investments appreciate by much, they may be able to keep the tax bill low, said Mr. Slott.
Q: Will the age at which IRA owners can take advantage of a popular tax break for charitable donations from IRAs rise to 72, along with the age for starting required annual distributions from IRAs and 401(k)s?
No. Currently, people who are 70½ or older can give money from a traditional IRA to one or more charities and exclude the amount donated from their taxable income. Nothing in the law will change that, said Mr. Slott.”
We hope this gave you a brief look at the changes and how it will affect you. May your year in reflection be great and the upcoming year be fruitful and filled with achieving your goals.
I was disabled in 2003, can I still stretch my IRA using the Uniform Life table?
Hi Steve, you would not be able to “stretch” your IRA, because that only applies to inherited IRAs. What you might be able to do is qualify for a hardship distribution each year, so that you could distribute funds from the IRA, without having to pay the early withdrawal penalty of 10%. You should talk with your CPA or custodian about what it takes to qualify for a hardship distribution.