Financial Fitness

Year-End Updates: Retirement Impacts of the SECURE Act and CARES Act

Changes to know about and actions to consider before December 31, due to the retirement account rules that took effect in 2020.

by Jennifer Jones - September 28, 2020

The SECURE Act and CARES Act both took effect over the past year, and each brought to life provisions to support workers and retirees—though with different goals in mind. The Setting Every Community Up for Retirement Enhancement (SECURE) Act focused on changes to retirement rules; the Coronavirus Aid, Relief, and Economic Security (CARES) Act focused on economic stimulus at the start of the coronavirus pandemic.

While the long-term impact of these laws is still to be determined, investors can benefit from understanding the key provisions of the two laws and applying that understanding to their decision-making as 2020 draws to a close.

1. Required Minimum Distributions (RMDs)

Distribution age:
The SECURE Act increased the age for required minimum distributions (RMDs) from 70½ to 72. That’s the age you must begin taking withdrawals from retirement plan accounts such as IRAs even if you don’t need the income. The change means individuals may keep their money in retirement accounts a little longer, potentially allowing for more growth.

2020 RMD waiver:
The CARES Act also waived all RMDs for 2020 for certain Qualified Retirement Plans (QRPs) and IRAs, including Inherited IRAs.

Coronavirus related distributions (CRDs):
Qualified individuals can also take a Coronavirus Related Distribution (CRD) of up to $100,000 from IRAs, QRPs, or both during 2020. There is no 10% additional tax for IRA owners or QRP participants under age 59 ½ and the QRP isn’t required to withhold the 20% for federal taxes.

“There are a couple great provisions regarding CRDs,” says Cathleen Davis-Whitmore, IRA Product Manager – Vice President at Wells Fargo Advisors. That includes the tax on the distribution, which is paid evenly over the next three years. But you can also repay some or all of it by the end of three years.

Action to consider before December 31, 2020

Review your plan for RMDs. You may want to take an RMD in 2020, even though you aren’t required to.

  • If you’re in a lower tax bracket than you expect to be in the future, taking the distribution now may result in long-term tax savings.
  • Distributions you take now will reduce your year-end balance, which could decrease the amount you have to distribute in future RMDs.
  • You could consider converting the distribution to a Roth IRA for the possibility of tax-free growth.

If you’re considering taking a CRD or distributions, Davis-Whitmore recommends consulting tax and financial advisors first.

2. New limits on Inherited IRAs

In the past, if non-spouses inherited an IRA, they typically only needed to withdraw the RMDs each year. As a result, the tax-advantaged growth potential of the IRA could be stretched over a longer period of time, potentially increasing in value during the time it was in the Inherited IRA.

As a result of the SECURE Act, most non-spouse beneficiaries who inherit an IRA from owners who die in 2020 and after will now have only 10 years to distribute the assets.

Actions to consider before Dec. 31

Update your estate plan. If the beneficiary of your IRA is someone other than your spouse, check with your attorney to determine how it could impact your estate planning strategy.

Update your distribution plan. If you inherit an IRA this year, check with your financial advisor to determine if this change might affect your distribution requirements and strategy.

3. No age limit for contribution to Traditional IRAs

Thanks to the SECURE Act, individuals older than 70½ can continue contributing to their Traditional IRA as long as they (or their spouse if filing jointly) are still earning income.

Davis-Whitmore describes this as a positive, particularly if you have a younger spouse that you think may outlive you.

Actions to consider before Dec. 31

Review your contribution plan. If you are age 70½ or older, consult your financial and tax advisors to determine if additional contributions make sense.

4. Exception to 10% additional tax for adoption and birth expenses

The SECURE Act added a new exception to the 10% additional tax for early or pre-59 ½ distributions.  This exception allows up to $5,000 to be taken from retirement plans for each birth or adoption without incurring the 10% additional tax. To qualify, the distribution must occur within one year of the birth or when adoption is completed. These amounts distributed can be repaid in full or in installments to an IRA or eligible retirement plan.

Actions to consider before Dec.  31

Talk with your tax advisor. If you’re planning to grow your family this year, consult with your tax advisor.

5. Charitable contributions for those who don’t itemize

The CARES Act makes a new benefit available to individual taxpayers who don’t itemize their deductions. It allows for a charitable deduction of up to $300 each and is deducted from the taxpayers’ income before calculating their adjusted gross income.

The act has also waived the adjusted gross income limitation, letting individuals take advantage of tax benefits previously unavailable.

Actions to consider before Dec. 31

Review your charitable gifts. If you itemize your charitable deductions, you may want to increase your cash gifts to offset Roth conversion income or significant capital gains from the sale of a concentrated position (a large holding in a single investment) or real estate.

Above all, consult with your advisors
Because these changes could have a number of implications on your retirement planning, it’s important to meet with your financial and tax advisors to better help understand how those changes will make an impact.

Jennifer Jones is a writer based in Charlotte who covers topics including business and finance.

Additional Resources

How could the SECURE Act impact your retirement savings?

Coronavirus Aid, Relief, and Economic Security (CARES) Act: what you need to know.

Wells Fargo Advisors does not provide legal or tax advice. Be sure to consult with your tax and legal advisors before taking any action that could have tax consequences.