Amidst the excitement of the holiday season and the seemingly endless coverage of impeachment proceedings in Washington D.C., you have may have missed news of sweeping changes to retirement savings that could have a significant impact to your financial plans. On December 20th, 2019 President Trump signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 into law.
The SECURE act totals 125 pages and contains 30 provisions that impact various aspects of the retirement and financial landscape beginning in 2020. That’s an awful lot of legal verbiage to slog through, so Bollin Wealth Management has done the legwork for you. What follows is a summary of the major changes that could impact your retirement or financial planning.
Changes to Distributions from Qualified Accounts
The SECURE Act favorably changes some of the rules for distributions from IRAs and other types of qualified accounts. But one major change in the SECURE Act could make it a lot more costly to inherit IRA assets going forward.
One of the more beneficial aspects of the new legislation raises the age investors must begin taking required minimum distributions (RMDs) from qualified accounts from age 70 ½ to age 72. As life expectancies for Americans increase, more Americans will likely delay retirement and the need for withdrawals from IRA type accounts. By delaying mandatory withdrawals, Americans can accumulate the larger nest eggs needed for longer retirements.
It is important to note that the increase in age for required minimum distributions applies only to individuals who turn age 70 ½ after December 31, 2019. Individuals who turned age 70 ½ prior to December 31, 2019 are still required to take their required minimum distributions under the old rule. This change is likely to cause some confusion among retirees in the short term. The IRS has also proposed revising the RMD table that determines the distribution factor to be used by retirees in 2021, but until that change has been made distributions will be determined using the old RMD table.
Another provision of the SECURE Act will help parents avoid going into significant debt. The SECURE Act now allows penalty-free distributions of up to $5,000 from IRA accounts before age 59 ½ to help cover the costs of childbirth or adoption expenses. This provision eliminates the 10% early withdrawal penalty associated with most IRA distributions before age 59 ½. The distribution from a traditional IRA for birth or adoption expenses is still treated as taxable income, however.
One provision of the SECURE Act negatively impacts an effective estate planning strategy that has been utilized by millions of people to efficiently transfer wealth and grow retirement assets for beneficiaries. The SECURE Act eliminates the ‘Stretch-IRA’ strategy for many non-spousal beneficiaries. Before the changes contained in the SECURE Act, all IRA and retirement plan beneficiaries could spread out their required distributions over the beneficiary’s life. This allowed younger beneficiaries to continue to grow qualified assets over their lifetimes while making minimal taxable required distributions.
Under the new rule changes, all amounts held by IRAs or retirement plans must be completely distributed by the end of the tenth calendar year following the year of the retirement plan or IRA owner’s death. This rule applies to both traditional pre-tax IRA/retirement plan assets or Roth assets, although only traditional pre-tax retirement plan assets and IRAs will generate a tax liability. There are some exceptions to the ten-year distribution rules that have been maintained with the new rule allowing certain individuals to avoid the ten-year timeline. Surviving spouses are still able to take distributions at their own RMD schedule. Likewise, chronically ill and disabled individuals are also exempt from the ten-year distribution requirement. Individuals who are not more than ten years younger than the plan or IRA owner, and minor children of employee/IRA owner are also exempt.
Changes to Contributions to Qualified Accounts
The SECURE Act will also make it easier for older Americans who stay on the job to save for retirement by removing the age cap for contributing to traditional IRAs. Before the SECURE Act the age cap for traditional IRA contributions was 70 ½, but now workers with earned income can continue to save for retirement with traditional IRA contributions at any age.
Changes to Employer-Provided Retirement Plans
Many of the changes introduced in the SECURE Act aim to make it easier for smaller businesses to establish or maintain a retirement plan, include more employees in the retirement plan, or provide retirement income options for plan participants.
Two of the provisions of the act provide tax incentives for small companies. The SECURE act increases tax credits for small employers offering new retirement plans from $500/year up to $5,000/year for three years. It also adds a $500/year tax credit for new or existing small employer 401(k) plans utilizing automatic enrollment for the plan. Small employers are defined as having one hundred or fewer employees.
The SECURE Act also expands participation in retirement plans. Except for collectively bargained 401(k) plans, the law now requires employers with 401(k) plans to offer one to employees who work more than one thousand hours in one year or five hundred hours over three consecutive years.
The SECURE Act makes it easier to adopt, alter and manage safe harbor 401(k) plans for employers. The legislation also makes it easier for two or more unrelated employers to join pooled employer plans (PEP) and multi-employer plans (MEP). The legislation gives smaller employers costs savings and economies of scale because employers no longer have to share common characteristics, such as operating in the same industry, to join under a PEP or MEP.
The SECURE Act also provides more options and information to 401(k) plan participants. Plan providers must now provide projected lifetime income stream updates to participants on an annual basis. The measure also opens the gate for more employers to offer annuities as investment options within 401(k) plans.
Like many law changes in the past, the SECURE Act is a mixed bag of helpful and harmful changes. Changing the rules on IRA contributions and RMDs to facilitate longer life expectancies and retirements is a positive step to help more Americans live a comfortable retirement. The loss of the “stretch-IRA’ as an estate planning tool will be very costly to future inheritors of IRAs and retirement plan assets. Easier access to annuities to participants in 401(k) plans is also potentially harmful to millions of Americans as annuity products can be both very costly to participants and difficult to understand because of their complexity. Annuities are also poor hedges against the ravages of inflation, a very real threat for long retirements.
How does the SECURE Act impact your plan? Schedule a meeting with one of the planners of Bollin Wealth Management to find out what changes you may want to consider making in light of the new rules and regulations.
Sources: The Wall Street Journal, Fidelity.com, Forbes.com