Passage of the Setting Every Community Up for Retirement Enhancement Act of 2019 or SECURE Act means some big changes for retirement planning and beyond.
The legislation, which took effect Jan. 1, 2020, affects employers, anyone saving for retirement, and many who will inherit a retirement plan, traditional IRA, or Roth IRA from a non-spouse.
Some changes encourage saving for retirement, but others negatively affect beneficiary payouts. The act leaves several questions unanswered. While the IRS is expected to publish additional guidance, that may take some time, so make sure to review your retirement, estate and tax plans with your financial advisors.
In the meantime, here is Bell Bank Wealth Management’s overview of how the legislation’s most significant changes could affect you.
For IRA owners and retirement plan participants: You may be able to grow your retirement savings for a longer period and delay paying income taxes on your savings.
How: The act allows people to make traditional IRA contributions after age 70½ as long as they are working and have earned income. The required minimum distribution (RMD) age also increased from 70½ to 72. Increasing the age you are required to withdraw a minimum payment means you can delay paying taxes on the money held in the account, and your investment could have more time to grow (subject to market fluctuations).
- If you were born on or before June 30, 1949, you must take the required minimum distribution under the rules existing prior to the act’s passage. If you were born on or after July 1, 1949, you are not required to begin distributions until age 72.
- If you own an IRA or inherited an IRA and are at least age 70½, you can still make qualified charitable contributions up to $100,000 per year directly from an IRA.
For non-spouse beneficiaries: You could have major income tax consequences for inheriting funds from traditional IRAs and retirement plans, such as 401(k)s.
How: Most beneficiaries will be required to fully withdraw inherited dollars from IRAs and retirement plans within 10 years of the account owner’s death. This change does not apply to beneficiaries who are spouses, disabled, chronically ill, less than 10 years younger than the account owner, or minor children of the account owner.
Effectively, the act causes accelerated distributions, forcing most beneficiaries to pay taxes on these dollars in a condensed timeframe. (Previously, beneficiaries were able to stretch required distributions over a much longer timeframe measured by a designated beneficiary’s life expectancy.) Additionally, in many instances, this shortened payout period may push beneficiaries into higher income tax brackets.
Note: If you have named a trust as a primary or contingent beneficiary of an IRA or retirement plan, you should review your beneficiary designations and trust terms with your tax and estate planning advisors to determine whether the trust is an appropriate beneficiary under this legislation.
For longer-term part-time workers: You may be able to participate in an employer-sponsored retirement plan.
How: Beginning after December 31, 2020, if you are age 21 or older and have worked at least 500 hours in a year and for three years in a row, you will be eligible to contribute to a company-sponsored qualified retirement plan, such as a 401(k). However, only years of service and hours worked after December 31, 2020, will count toward meeting the requirement.
Note: The first employees affected by this legislation will be eligible in 2024.
For parents (or would-be parents): You could use some 401(k) retirement savings to help offset the cost of having or adopting a child.
How: The act allows penalty-free withdrawals of up to $5,000 from 401(k) plans within a year of a child’s birth or adoption. The distribution is still income taxable and can be repaid to the retirement account.
For people with 529 plans: You may be able to do more with your education savings dollars.
How: The act expands the definition of “qualified higher education expenses” to include apprenticeship program costs and up to $10,000 in qualified student loan payments. (That is a lifetime limit per 529 plan beneficiary.)
Note: This change applies to distributions made after Dec. 31, 2018.
For small-business owners: Offering a retirement plan to employees now may be more affordable.
How: The act increases business tax credits for retirement plan startup costs and offers a tax credit for plans that add automatic enrollment. The act also allows 2 or more unrelated employers to join a pooled employer plan. This means only one Form 5500 needs to be filed, and it may help reduce administrative costs.
For employers: Safe harbor retirement plans and lifetime income investment options may be easier to take advantage of under the act.
How: The act increases flexibility for employers to establish safe harbor retirement plans (where employers make annual contributions on behalf of employees) by permitting employers to add safe harbor non-elective features to existing plans during the plan year or the next year, with increased contributions. Previously, most changes to safe harbor plans could only be done before the start of a plan year.
The act also reduces some of the barriers employers have faced in offering annuities or lifetime income investment options to employees. Employers will receive certain protections when selecting insurers for guaranteed retirement income contracts (such as annuities) offered in the retirement plan. The legislation also gives employers liability protections if employees or their beneficiaries lose money because an insurer can’t satisfy its future financial obligations under the contract’s terms. Additionally, employees who retire or change jobs will have an easier time moving their investment contracts.
Note: Penalties have increased for failing to file retirement plan returns and provide notices to employees on time. Benefit statements will be required at least once a year to show the monthly payments an employee would receive if they had to use their retirement account for income. (The Department of Labor will issue further guidance, and the disclosure requirement on statements will be effective 12 months following issuance of that guidance.) To make sure the SECURE Act changes haven’t impacted your financial plans and goals, review this information with your financial, tax and estate planning advisors.