After months of legislative delays, in December 2019 Congress and President Trump enacted the most significant legislation affecting investors in years—the Setting Every Community Up for Retirement Enhancement Act—better known as the SECURE Act.
The SECURE Act offers numerous benefits for workers saving for retirement, retirees, students and employers that offer or are thinking about offering retirement plans. But there are several changes that may require some investors and retirement plan sponsors to revisit their financial plans.
Below is a high-level overview of its most impactful provisions.
Required minimum distributions: The good and the problematic
Raising the RMD age
If you don’t turn 70½ until 2020 or later, you will now have more time to save for retirement. Instead of having to take required minimum distributions (RMDs) from your company’s 401(k) plan or a Traditional IRA at age 70½, you’ll be able to delay taking them until age 72. Note that this new rule does not apply to Roth IRAs, which have no RMD requirements.
Elimination of the “stretch” provision
One of the most controversial provisions of the SECURE Act is the elimination of so-called taxable “stretch IRA.”
In the past, non-spouses (such as your children or grandchildren) who inherited an IRA or employer retirement plan account could reduce the amount of annual RMDs by “stretching” them out over their expected life expectancy.
Now, non-spouse heirs who inherit your retirement accounts must fully deplete the assets in these accounts within ten years of your death. While annual RMDs are not required, if the assets are not in a Roth IRA, any distributions of tax-deductible or pre-tax contributions and tax-deferred earnings will be taxable as ordinary income, which could result in undesirable tax burdens for your heirs.
Expanded benefits for retirement savers
Lifetime contributions for Traditional IRAs
Before the SECURE Act, you couldn’t contribute to a Traditional IRA after age 70½. This rule has been eliminated, so you now can contribute to your account as long as you have earned income—even if you’re taking RMDs at the same time. This will enable you to replenish some of the money withdrawn from your IRA so you can continue to benefit from its tax-deferred growth.
Grad students can now contribute to IRAs
In the past, non-tuition fellowship and stipend payments to graduate and postdoctoral students could not be counted as income that allowed them to contribute to an IRA. Now, these payments are considered eligible income, which will these students to start saving for retirement earlier.
Retirement assets can help defray family-raising costs
You can now withdraw up to $5,000 from a retirement account penalty free before age 59½ to help pay for the costs of adoption or a new birth. However, these withdrawals will be taxed as ordinary income.
Greater flexibility for use of 529 plan assets
Use of 529 plan assets for vocational training costs
529 plans were originally set up to help pay qualified education expenses for college students or those attending private elementary and secondary schools. But now funds in these accounts can be used to pay for vocation-related training expenses such as apprenticeships.
Reducing student loan burdens
College graduates burdened by student loans can use up to $10,000 of 529 plan assets to help pay off or reduce this debt.
More attractive features for retirement plan participants and sponsors
Part-timers can now participate
Part-time employees over age 21 who work at least 1,000 hours in a year or 500 hours a year for three consecutive years will be eligible to join their employer’s retirement plan.
“Income at a glance”
In their statements, retirement plan participants will be able to view a high-level illustration of how much monthly income they might receive if their total account balance was used to provide a steam of income over their lifetime. This will help participants figure out if they should be making adjustments in their deferral rate or changing their investment strategy to potentially increase this income.
Greater ease in adding annuities to plans
The SECURE Act makes it easier for employers to offer annuities as investment options in their plans. Annuities may be popular among employees who are looking to invest part of their portfolio in a product that may deliver guaranteed income over the course of their lifetime during retirement.
Higher automated deferral caps
Many retirement plans offer automated deferral features that increase the amount withdrawn from employees’ paychecks every year unless they opt out of this feature. In the past, this deferral amount was capped at 10%. This cap is now increased to 15%, but it can’t be used during the employee’s first year of participation in the plan.
New tax credits for employers that offer retirement plans
Smaller employers that set up a retirement plan may now be eligible for tax credits of up to $5,000 to help defray qualified startup costs—up from $500 in years' past. In addition, employers that use automatic enrollment in their retirement plans may receive a tax credit of up to $500 per year. This credit is available for both startup plans and existing plans that adopt auto enrollment features.
Multiple employer plans
It can be expensive for smaller employers to offer standalone retirement plans. The SECURE Act now makes it easier and more cost-effective for these firms to offer retirement plans by easing rules that enable them to participate in multiple-employer-plans (MEPs). In an MEP, all participating employers share trustees, fiduciaries, plan administrators and recordkeepers.
Where to learn more…and what to do next
For a broader view of the SECURE Act's provisions, click here for a comprehensive overview provided by the National Association of Plan Advisors.
The SECURE Act may dramatically change the way you and your employees save for retirement, withdraw money from your retirement plans, and pass your wealth on to your heirs. With so many moving parts, you may want to meet with your financial advisor, accountant or estate planner to assess how its pros and cons may affect you today—and later on.
This material has been provided for general informational purposes only and does not constitute either tax, legal of financial advice. Although we go to great lengths to be sure our information is accurate and useful, we recommend that you consult a tax preparer, professional tax advisor, lawyer or financial advisor to discuss your specific situation
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