On December 20, 2019, President Donald Trump signed into law the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The goals of the new legislation are to increase access to workplace retirement plans and to expand opportunities for employees to save for retirement. The new law went into effect in January 2020 and contains the most significant retirement policy legislation since the Pension Protection Act way back in 2006. Gee, a new sweeping law that affects employers and their employees – with little fanfare to comply with the new requirements . . . “Imagine That™!“
Here are ten of the most significant changes in the SECURE Act concerning retirement planning:
- RMDs begin at age 72—Before the SECURE Act, you generally had to begin taking required minimum distributions (RMDs) from your traditional IRA or qualified retirement plan in the tax year you turned age 70 ½. Now, if you turn age 70 ½ on January 1, 2020 or later, you can wait until you are 72 before taking RMDs.
- You can continue to make contributions to a traditional IRA past age 70 ½—Prior to the SECURE Act, you were not permitted to invest in your traditional IRA if you were age 70 ½ or older. The new law does away with the age restriction, and you are permitted to contribute to a traditional IRA as long as you continue to have earned income.
- Part-time employees may be able to make contributions to a 401(k) plan—Before the SECURE Act, part-time employees who worked less than 1,000 hours per year were generally ineligible to participate in their employer’s 401(k) plan. Now, employees who have worked more than 1,000 hours in one year or at least 500 hours for the last three consecutive years are eligible to participate in a 401(k) if they are at least 21 years old. For purposes of calculating the 500 hours of service during a 12-month period, 12-month periods beginning before January 1, 2021 will not be taken into account.
- Penalty-free withdrawal of $5k for each birth/adoption of a child—Prior to the SECURE Act, early withdrawals from a retirement plan were assessed a 10% penalty. The new Act permits each parent to withdraw up to $5,000 from an IRA or qualified retirement plan to deal with expenses of a birth or adoption of a child. Although the $5,000 withdrawal is penalty free, you will be required to pay income tax on the distribution. (Note: A defined benefit plan is not included in the definition of “qualified retirement plan” and you will be assessed the 10% early withdrawal penalty if you cannot withdraw the money from an IRA or another retirement plan.)
- Small-business owners receive a tax credit up to $5,000 for starting a retirement plan—The SECURE Act provides a new retirement plan credit for small-business owners of $250 per non-highly compensated employees who are eligible to participate in a workplace retirement plan (minimum credit of $500 and maximum credit of $5,000). This credit applies to businesses with up to 100 employees over a 3-year period beginning January 1, 2020 and applies to SEP and SIMPLE IRAs, 401(k)s, and profit-sharing types of plans. If the retirement plan includes automatic enrollment, an additional credit up to $500 is also available.
- Greater ability for small businesses to pool retirement plans—Under prior law, businesses usually avoided participating in what are called “Multiple Employer Plans” or MEPs because if one employer did not meet the plan requirements, the plan would fail for all the others too. Under the SECURE Act, employers no longer need to share a “common characteristic,” such as being in the same industry. Small businesses can work together to offer MEPs and enjoy access to more features at an affordable price.
- Annuities will become more commonly offered in 401(k) plans—Before the SECURE Act, employers had a fiduciary responsibility to ensure annuity products were appropriate for their employees. Now, the employer can satisfy a safe harbor provision and no longer have fiduciary obligations; they will be protected from being sued if the chosen insurer fails to pay claims in the future. This change will increase the availability of annuities in 401(k) plans. Also, if you change jobs, you can roll the annuity to a 401(k) at your new employer or even into an IRA and avoid surrender charges and other fees.
- The maximum contribution rate for participants in auto-enrollment 401(k) plans is 15%—Prior to the SECURE Act, the maximum contribution rate employers could select was 10% for auto-enrolled 401(k) plans (called “qualified automatic contribution arrangements” or QACAs for short). Now, the employer can set the contribution rate as high as 15%, except for the first year an employee participates in the 401(k) plan. While the employer sets the default contribution rate, employees may elect to change the contribution rate based on their unique circumstances.
- Up to $10k in 529 plans can be used to pay student loan debt—Under the new law, you can use up to $10,000 in a 529 college savings plan to pay student loan debt. The $10,000 limit is a per-person limit, so you could pay up to $10,000 in student loans for each child. This new provision will come in handy if there is money remaining in the college savings plan after your child(ren) graduates. The law also permits the 529 plan to pay the expenses of apprenticeship programs, which include fees, books, supplies and required equipment.
- RMDs on inherited accounts by a non-spouse need to be distributed within 10 years in most situations—Except for a few limited exceptions discussed below, the SECURE Act has eliminated what was called the “stretch” provision for a non-spouse beneficiary who inherits a traditional or Roth IRA or a defined contribution plan, such as a 401(k). Now, non-spouse beneficiaries will have to distribute all the money in an inherited IRA or defined contribution plan with 10 years of the death of the owner, unless they are a child that has not reached the “age of majority” (which varies between states), disabled, chronically ill, or no more than 10 years younger than the deceased. This change in the law is effective for RMDs taken from accounts whose owners die in 2020 or later. The RMD rules for accounts inherited from owners who died before 2020 remain in effect and the stretch rules will apply to the beneficiary.
Due to the SECURE Act’s Changes, Beneficiary Designations and Living Trusts Need to be Reviewed
Because of the elimination of the “stretch” provision for non-spouse inherited IRAs and defined contribution plans, such as 401(k) plans, beneficiary designations need to be reviewed! If a beneficiary designation is to a non-spouse and doesn’t meet any of the exceptions listed in Item 10 above, you may want to reevaluate your retirement and estate planning strategies. Withdrawals by the beneficiary will be taxed at their ordinary income tax rate, which means that someone in a higher tax bracket would pay more for their inheritance than if they received the inheritance in another form. Do you want the beneficiary to be required to distribute all the money within 10 years or do you want something else?
Living Trusts also need to be reviewed if they are listed as the beneficiaries of IRAs or defined contribution plans, such as 401(k) plans. In the past, many people set up Living Trusts with a “pass-through” feature, which let the beneficiary stretch out the tax benefits of the inherited account based on the RMDs over their own life expectancy. Such a provision will no longer work under the SECURE Act because the entire amount of the inherited account must be distributed within 10 years. If you are in this situation, an amendment to the Living Trust will need to be made and should be drafted by an estate planning attorney to ensure the revision is properly made.
Conclusion: The SECURE Act has Made Many Changes to Retirement Planning
As you can see from the material above, the SECURE Act has made numerous changes in the law concerning retirement planning. Have you have been putting off retirement planning specifically or your overall planning in general? If so, NOW is the best time to meet and discuss your personal and financial goals and desires about retirement, insurance and estate planning. If you would like to avoid the pitfalls and traps that can frustrate even the most well-intentioned person, please contact me to discuss your retirement planning needs. Having confidence in a plan that encompasses and alleviates your various concerns . . . “Imagine That™!“
Written by R. J. Kelly – February 2020
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