Changes to Qualified Accounts

January 22, 2020
Authors: Brion Harris and Dirk Rinehart, CPA

Last month, on Friday, December 20, 2019, President Trump signed into law two spending bills (appropriations bill) that continue funding for several federal government operations and projects. Included with the bill were numerous provisions that will significantly effect various qualified accounts (both qualified retirement accounts such as 401(k)s and IRAs, along with 529 accounts). 

Here is a short summary of some of the changes enacted:

Increase the age for required minimum distributions from 70½ to 72. Instead of having to take out annual RMDs from your 401(k) and IRA starting when you turn 70 ½, the minimum age would be 72.  Account owners who turned or will turn 70½ before December 31, 2019, should ensure that they have taken their RMD or have plans to do so prior to the deadline of April 1, 2020.  Account owners turning 70½ on or after January 1, 2020 will not need to begin taking required minimum distributions until 2022.

Eliminate the prohibition on traditional IRA contributions for those age 70½ and older. Individuals may continue contributing to an IRA at any age, as long as they have earned income.

Penalty-free retirement plan withdrawals for new parents. Within a year after a birth or adoption, new parents could take up to $5,000 from a 401(k) or IRA or other qualified retirement plan.

It would require inherited IRAs to be depleted within ten years. Under current law, inherited retirement accounts (often referred to as “Stretch IRAs”) can distribute those assets over the beneficiary’s lifetime. Under the new law, those assets must be distributed within 10 years.  This provision has potentially significant estate planning implications.  There are exceptions for spouses, minor children, disabled individuals and people less than 10 years younger than the decedent.  The bill does not affect existing inherited accounts.  It only applies to accounts that are inherited in 2020 and beyond.

Part-time workers can participate in 401(k) plans. 401(k) plans typically require employees to work 1,000 hours in a 12-month period to participate in the plan.  The new threshold would be 500 hours for three consecutive years. Note: This isn’t mandatory, so it’s in the employers’ court, and it wouldn’t be effective until January 1, 2021.

Change to 529 plans.  Assets in these college-savings plans can now be used to repay up to $10,000 in student loans.