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Almost a year ago, we wrote a blog post referencing the SECURE Act, which stands for “Setting Every Community Up for Retirement Enhancement.” At that time, the Act had just passed the House Ways and Means Committee. Whether it would become law, and what changes it might undergo first, was uncertain at the time.
In late December 2019, the SECURE Act passed the U.S. Senate and became law. It’s now time to take a good look at what the new law does, and how it might affect your retirement and tax planning. The SECURE Act is one of the most significant tax law changes in at least the last decade.
First Required Minimum Distribution (RMD) at Age 72
Workers with Individual Retirement Accounts (IRAs) and 401(k)s have long known that they would have to begin taking required minimum distributions (RMDs) by April 1 of the year following the year in which they turn 70 ½. The SECURE Act has changed that, allowing people who turn 70 ½ during calendar year 2020 to begin taking their RMDs at age 72. This may be an advantage to Americans, who are generally working longer and may want to leave their retirement savings untouched for as long as possible.
What if you turned 70 ½ in 2019? If you have already started to take your RMDs, it is probably best to continue doing so. Failing to take an RMD in 2020 could have an impact on your taxes, so speak to your tax advisor before making any changes.
If you are about to turn 70 ½ in 2020, now might be a good time to sit down with your financial planner to determine if taking an RMD this year is a good idea, or if you would be better off taking advantage of the SECURE Act provision.
Keep Making IRA Contributions if You Continue to Work
Again in recognition of the fact that many Americans are continuing to work beyond “traditional” retirement age, the SECURE Act extends the time available to contribute to a traditional IRA. Prior to the SECURE Act, you could not make contributions to your IRA past age 70 ½. Under the Act, so long as you continue working, you can continue to contribute to your IRA indefinitely. Note that this does not apply for tax year 2019, but applies for 2020 and beyond. In fact, you may make your 2020 IRA contribution as late as April 15, 2021.
Talk to your financial planner about your plans for retirement, including how long you might like (or need) to work, and when you will need to begin drawing on your retirement accounts.
New “Ten Year” Rule for Inherited IRA and 401(k)s
The most significant negative impact of the SECURE Act relates to the changes in how beneficiaries must take distributions from retirement accounts inherited from others. In the past, if a beneficiary inherited a retirement plan like a 401(k) or IRA, you could take distributions (and pay taxes) based on your life expectancy, “stretching” payments out to provide a consistent source of income and often, to lower taxes.
The SECURE Act has eliminated the opportunity to stretch out distributions. Now, if you inherit an IRA or 401(k) plan from someone who passed away on or after January 1, 2020, you will probably have to withdraw all assets within ten years after the death of the original account holder.
The SECURE Act has eliminated the opportunity to stretch out distributions. Now, if you inherit an IRA or 401(k) plan from someone who passed away on or after January 1, 2020, you will probably have to withdraw all assets within ten years after the death of the original account holder.
There are some exceptions to this new rule. If assets were left to a surviving spouse, minor child, or a chronically ill or disabled beneficiary, the ten year rule will not apply. Beneficiaries who are less than ten years younger than the original account holder are similarly exempt from the new rule. If you inherited an IRA or are beneficiary of an inherited 401(k) from someone who died before January 1, 2020, you also are not subject to the new rule.
For many people, this will require a different approach from an estate planning and perhaps financial planning perspective. What action should be taken will depend upon factors such as: who your beneficiaries are; how and when you want them to receive their inheritance; their age; their health; and the amount you hold in your qualified retirement accounts.
Since the law went into effect just before the end of the year, we are evaluating what the best options are for our clients. There are a number of options which we will be rolling out to our clients. As we complete our interpretation of the SECURE Act and as the IRS clarifies some of the ambiguities in the law, we will be able to better advise our clients.
As such, within the next month, our firm will be offering 30-minute phone consultations for our clients and others who want our firm to evaluate their situation and estate planning. For our clients who wish to discuss this matter immediately, we welcome you to contact our office and schedule a phone consultation.
In addition, over the next several months, we will be doing a series of articles as to recommended estate planning options to deal with the impact of this aspect of the SECURE Act, so stay tuned.
Changes for Small Business Owners
The SECURE Act brings changes for small business owners, too. Under the Act, small business owners who start a retirement plan can receive a tax credit of up to $5,000. Employers with up to 100 employees over a three-year time frame starting after December 31, 2019 are eligible. Employers would receive a tax credit of $250 for each non-highly compensated employee eligible to participate in 401(k), SEP, SIMPLE, and profit-sharing plans. Plans featuring automatic enrollment net another $500 in tax credit for the employer. This is a great opportunity for small employers who have not yet established a retirement plan for their employees to do so.
The SECURE Act creates another opportunity for small business owners. It will allow unrelated employers to create retirement planning opportunities for employees by participating together in a Multiple Employer Plan (MEP).
The SECURE Act creates another opportunity for small business owners. It will allow unrelated employers to create retirement planning opportunities for employees by participating together in a Multiple Employer Plan (MEP). These plans were previously less attractive to employers because of possible adverse tax consequences: if one employer in the plan failed to abide by tax qualification rules, all employers in the plan could be penalized. The SECURE Act does away with this “one bad apple” rule.
Open MEPs as encouraged by the SECURE Act could create access to an employer-based retirement plan for millions of workers in the private sector.
Benefits for Parents
The SECURE Act also offers some benefits for parents: both those who are just beginning to raise children, and those who are nearly finished. Under the Act, a person may take a “qualified birth or adoption distribution” of as much as $5,000 from certain defined contribution plans, including 401(k)s and IRAs to pay for the birth or adoption of a child. The usual 10% early withdrawal penalty will not apply. In addition, these qualified birth or adoption distributions may be repaid as rollover contributions to eligible plans.
Parents whose children have graduated from college, but still have funds left in a 529 plan, can now use those funds to repay up to $10,000 of student debt over the lifetime of the student. In addition, 529 plans may also be used to pay for eligible apprenticeship programs. These programs are growing in popularity, and an increasing number of students are electing apprenticeship to a trade instead of, or in addition to, college.
The SECURE Act could have other impacts on your estate planning and retirement planning. To discuss how the SECURE Act could affect your financial future, we invite you to contact our office.