On January 1st of this year, most of the provisions of the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) went into effect. This act, which was passed late last year, is intended to aid workers in saving for their retirement. There are several new reforms contained in the act that will have an immediate impact on retirees, and those approaching retirement age. Let’s take a few moments to review these reforms.
The Biggest SECURE Act Changes Impacting You
- Required Minimum Distributions
The SECURE Act makes a significant change to the age where owners of traditional IRAs, 401(k)s, and other tax-deferred retirement plans must begin taking required minimum distributions (RMDs) on an annual basis. Previously, RMDs were required to begin during the year when an account owner turned 70.5 years of age. Now, RMDs will not have to begin until age 72, starting with any persons who were born after June 30, 1949.
Please note that, if you turned age 70.5 in 2019 and have begun to take RMDs, you should continue to do so going forward. It is possible that the IRS will issue further directives on this point, so you may wish to consult with your tax professional regarding any distributions for this year.
- Elimination of Stretch IRAs
The SECURE Act eliminates the ability to “stretch” an IRA or 401(k) that is inherited from a non-spouse. Previously, some beneficiaries were allowed to withdraw RMDs from these types of accounts for the entire expected span of their lives. Now, beneficiaries will be required to withdraw all of the assets from the inherited IRA or 401(k) within 10 years of the death of the original owner.
This provision will apply to IRAs whose original owners passed away on or after January 1, 2020. Exceptions are included for surviving spouses, minor children, a disabled or chronically ill beneficiary, and beneficiaries who are less than 10 years younger than the original IRA owner or 401(k) participant.
Other Important SECURE ACT Changes
- No Age Limit for Contributions
In the past, there has been an age limit of 70.5 years, past which it was not possible to make any further contributions to a traditional IRA. The SECURE Act repeals this age limit, and allows for continued contributions to a traditional IRA, so long as you are still working. Keep in mind, you need earned income in order to contribute to retirement accounts.
This provision is intended to aid workers who choose to continue working past the typical retirement age. It will hopefully help them to avoid superannuating their retirement savings.
- Part-Time Workers and 401(k)s
Up until now, part-time workers (those working less than 1,000 hours per year) have generally been excluded from participating in employer-sponsored 401(k) plans. The SECURE Act adds a requirement (with an exception for collectively bargained plans) to offer the ability to join a 401(k) plan to any worker who works more than 1,000 hours in a given year or at least 500 hours per year over a period of three consecutive years.
This requirement is intended to aid long-term part-time workers to better save for their retirement.
- Small Business Retirement Plans
The new legislation includes tax credits for small business owners, in order to encourage them to start retirement plans for their employees. The credit is $250 per non-highly compensated employee, with a minimum of $500 and a maximum of $5,000. The credit applies to small businesses with up to 100 employees over a 3 year period beginning after December 31, 2019, and will apply to SEP, SIMPLE, 401(k), and other profit-sharing plans.
The new law also helps to facilitate the adoption of multiple employer plans (MEPs). The law allows for unrelated employers to band together to participate in an MEP; it also does away with the IRS “one bad apple” rule, which made all employers participating in an MEP face adverse tax consequences if only one of them failed to satisfy the tax qualification rules for an MEP.
- Annuities and 401(k)s
The SECURE Act includes a provision attempting to encourage plan sponsors to include annuities as an option in their workplace retirement plans by reducing the liability they might face if the insurer of the annuity is unable to meet its financial obligations.
This particular provision could potentially prove to be a double-edged sword. While annuities have frequently been a very beneficial and useful product for many retirees, they can be very complex to set up properly, and failing to do so can have adverse consequences on the retirement planning of an employee. It would be wise to consult a financial adviser before entering any annuity as part of a plan.
Other Miscellaneous Provisions
Aside from those mentioned above, the SECURE Act includes several other provisions that may impact you:
- Under the Act, you may now make a withdrawal of up to $5,000 per parent with no penalty from a defined contribution plan, such as a 401(k) or an IRA, to assist with expenses related to the birth or adoption of a child.
- Families or individuals who own 529 savings accounts to pay for college expenses may now use up to $10,000 from these accounts to pay student debts over the course of the student’s lifetime.
It could perhaps be said that none of the changes made by the SECURE Act are particularly radical; many of them are meant to assist workers in saving for retirement and making their savings last. Some may even be detrimental in the short term. Ultimately, only time will tell as to the impacts these changes will have.