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How the SECURE Act and the CARES Act Affect Your Retirement Accounts

Information updated as of July 3, 2020

In the last 4 months, two pieces of legislation have been enacted that have a major impact on all Americans, and more specifically, their retirement accounts. We hope this information will be a comprehensive summary that you can refer to when you have questions.

If you have any questions or concerns outside the scope of what this summary provides, please contact your Hefren-Tillotson financial advisor directly, or click here to be paired with a financial advisor.

SECURE Act Changes:

Stretch IRA

  • The stretch provision for non-spouse beneficiaries of inherited IRAs has been eliminated. Most beneficiaries are now subject to the “10-Year Rule.” The rule states that the account must be completely depleted by the 10th year following the account owner’s death. This potentially results in more taxes being paid over a shorter period of time. Exceptions to this rule apply for chronically ill or disabled beneficiaries, individuals who are not more than 10 years younger than the account owner, and any minor children of the original account owner. These beneficiaries are known as “Eligible Designated Beneficiaries.”
    • With all of these changes, it is very important to review account beneficiary designations. Many trusts that were set up as beneficiaries of retirement accounts no longer will function the way that was originally intended.
    • Conduit trusts were typically set up so that the minimum distribution from the IRA would be disbursed to the trust each year. That amount would then be distributed to the beneficiary of the trust. Now that the 10-year rule is in place, the entire IRA would be distributed to the trust, and then to the beneficiary of the trust in year 10. That would result in a large tax bill in year 10 as well as a loss of trust protection for the IRA assets.
    • Accumulation trusts allow the distributions in the IRA to remain in the trust for a period of time before being distributed to beneficiary. As a result of the SECURE Act, the entire IRA balance, once distributed from the IRA, would be held in the trust, which is taxed at much higher tax rates.

Required Minimum Distributions

  • Required Minimum Distributions (RMDs) for retirement accounts now begin at age 72. Individuals who turned 70 ½ prior to January 1, 2020 will still be subject to the old rules. Anyone turning 70 ½ on January 1, 2020 or later will now be required to take distributions beginning in the year they turn 72.

IRA Contributions

  • There is no longer an age limit on IRA contributions. Individuals are now able to contribute to an IRA at any age provided they have qualified earned income.

Qualified Charitable Distributions

  • Qualified Charitable Distributions (QCDs) are still allowed beginning at age 70 ½. This means that an individual turning 70 ½ in 2020 will be able to make a QCD despite not having to take an RMD.

Birth/Adoption Withdrawal

  • There is now a $5,000 withdrawal exception from retirement accounts for the birth or adoption of a child. An individual may take a withdrawal of up to $5,000, penalty free, at any point during the one-year period beginning on the birthdate or adoption date of a child. This is a per person limit meaning a husband and wife could each take $5,000 from their retirement account for the same child.

CARES Act Changes:

Hardship Loans

  • The maximum loan amount that can be borrowed from an employer plan has been increased to $100,000 for affected individuals.
    • The amount of money eligible for a loan is now 100% of the vested account balance.
    • Loan payments due in 2020 are also delayed until 2021.

Contribution Deadline

  • The IRA contribution deadline has been pushed back to July 15, 2020 along with the 2019 tax filing deadline.

Early Distributions

  • The CARES Act and IRS Notice 2020-50 waive the 10% early distribution penalty for distributions up to $100,000 from both employer and individual retirement accounts, for individuals who meet any of the following requirements:
    • Is diagnosed, or whose spouse or dependent is diagnosed, with the virus SARS-CoV-2 or the coronavirus disease 2019 (collectively, “COVID-19”) by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act); or
    • Experiences adverse financial consequences as a result of the individual, the individual’s spouse, or a member of the individual’s household (that is, someone who shares the individual’s principal residence):Being quarantined, furloughed or laid off, or having work hours reduced due to COVID-19; Being unable to work due to lack of childcare because of COVID-19; Closing or reducing hours of a business that they own or operate due to COVID-19; Having pay or self-employment income reduced due to COVID-19; Or having a job offer rescinded or start date for a job delayed due to COVID-19
    • The distributions are not subject to mandatory withholding requirements.
    • The income from the distribution can be spread out over three tax years.
    • The individual has three years to return any or all of the distribution taken to the account.

Required Minimum Distributions

  • Required minimum distributions due in 2020 have been waived. 
  • This change applies to any distribution that needed to be taken in 2020. This means that anyone who was required to take their first year distribution in 2019, and planned on taking it in 2020, will no longer be required to do so.
  • Some individuals may want to return their 2020 RMD to their account if they have already taken it. They can return all or a portion of the distribution to the account via the rules below from the June 23, 2020 IRS Notice:
    • The 60-day rollover period that would normally apply to a distribution has been extended to August 31, 2020. This means that the deadline for returning a distribution taken on January 1, 2020 or later, is the later of 60 days from the distribution or, August 31, 2020.
    • Any rollovers back into the plan up to what would have been the RMD for the year will NOT be subject to the one rollover per 12-month limit. This means that individuals who may have taken their RMD over multiple distributions will be able to return any and all amounts taken up to their RMD amount for the year.
    • This new IRS notice (2020-51) also applies to non-spousal beneficiaries of IRAs. Any inherited IRA RMDs that were taken on January 1, 2020 or later are eligible to be returned as long as it’s done by August 31, 2020. These transactions are also excluded from the one rollover per 12-month rule.
  • 2020 is no longer counted for purposes of the 5-year rule. For non-designated beneficiaries either set to begin their 5-year distribution period, or for those already in the middle of it, 2020 can be skipped entirely.
DISCLAIMER: Past performance does not predict future results. This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.

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