Breaking Down the SECURE Act
The Setting Every Community Up for Retirement Enhancement (SECURE) Act went into effect on Jan. 1, 2020, and there have been a lot of questions about what impact the new law will have on employees and their retirement plans.
Colloquially known as the Secure Act, the legislation was passed by both houses of Congress and then signed into law by President Donald Trump on Dec. 20, 2019 to help increase the number of people saving for retirement through a workplace plan.
Whether the act will accomplish that goal remains to be seen, but there are some significant changes that could affect individuals saving into an employer-sponsored retirement plan, IRA or other tax-advantaged plan.
Required Minimum Distributions
The law has raised the age of Required Minimum Distributions (RMDs) from 70½ to 72 for individuals who will turn 70½ after Jan. 1, 2020. The United States government requires individuals who save into tax-deferred retirement accounts to take RMDs. These distributions are required for IRAs, SEP accounts and qualified plans like 401(k)s. In most cases, if an employee was still working at 70½, they were able to postpone taking the RMDs from a retirement plan with their current employer, but they were required to take RMDs from an IRA at 70½, even if they were still working.
It appears the change does not apply to individuals who turned 70½ prior to December 31, 2019 but are not yet 72 years old, so be sure and check with your tax advisor and Financial Planner for guidance concerning your 2020 distributions if you fall in that age range.
If you contribute to a traditional IRA, the law has removed the age limit to contribute to IRAs. The previous age limit to contribute to an IRA was 70½. Since the trend in recent years has shown Americans are working longer, this change allows workers to save longer and postpone having to take distributions from their IRAs.
The law also implements penalty-free withdrawals from retirement plans or IRAs for parents who give birth or adopt a child. Parents can withdraw up to $5,000 from these tax deferred accounts without incurring the 10% early withdrawal penalty. Generally, an individual must be 59½ to take distributions sans the penalty.
If you are the beneficiary of an IRA, and the owner passes away after Dec. 31, 2019, there could be a change in the way you are required to take distributions from that account. Many people will need to withdraw all inherited IRA assets from the account within 10 years of the death of the original account holder. There are exceptions to this rule which include assets left to a surviving spouse, a minor child, a disabled or chronically ill individual and beneficiaries who are not more than 10 years younger than the original account owner.
The new law eliminates utilization of the stretch IRA, which was used as a strategy to prolong tax-deferred growth on accounts passed on to non-spouse beneficiaries. Beneficiaries with inherited IRAs will want to think through their cash flow during the ensuing 10 years to try and strategically withdraw from the retirement accounts in years they have lower income. For example, a beneficiary who is still working but planning to retire in three years should consider pushing the withdrawals until after he or she retires. If the original owner of the IRA passed away prior to Jan. 1, 2020, no changes will need to be made to the beneficiary’s distribution schedule.
Tax-Advantaged Retirement Accounts and 529 Plans
The law creates a safe harbor for employers offering annuities (guaranteed income contracts), as investments in defined-contribution plans by limiting the potential liability the employer will face if the employer doesn’t choose the lowest cost contract or in the event the annuity provider is unable to meet its financial obligations in the future. The law also allows employees who change jobs the option of moving their annuity to another 401(k) plan or IRA without surrender charges and fees.
Employers are now required to include long-term part-time workers as participants in defined contribution plans if the employee works at least 500 hours but less than 1,000 hours per year during a three-year period. The part-time employee is still included if he or she works 1,000 hours in a year.
The law increases the cap for automatic enrollment of employees in Safe Harbor retirement plans from 10% to 15% of wages. Employers who create a 401(k) or Simple IRA plan with automatic enrollment will also now receive a $500 maximum tax credit per year.
The law allows individuals with 529 savings plans to use the plan for repayment of up to $10,000 in qualified student loans and for expenses for certain apprenticeship programs.
In all, there are 29 provisions to the SECURE Act, so it would be prudent to speak with your Financial Planner to find out what impact the new law could have on your retirement accounts and plans.
For more information on the SECURE Act, visit: https://www.congress.gov/bill/116th-congress/house-bill/1994