The Setting Every Community Up for Retirement Enhancement (SECURE) Act was enacted in December 2019 as part of a larger federal spending package. This long-awaited legislation expands savings opportunities for workers and includes new requirements and incentives for employers that provide retirement benefits. At the same time, it restricts popular estate planning strategy for individuals with significant assets in IRAs and employer-sponsored retirement plans.
Here are some of the changes that may affect your retirement, tax, and estate planning strategies. All of these provisions were effective January 1, 2020, unless otherwise noted.
Benefits for Retirement Savers
Later RMDs — Individuals born on or after July 1, 1949, can wait until age 72 to take required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans instead of starting them at age 70½ as required under previous law. This postpones payment of income taxes and gives the account a longer time to pursue tax-deferred growth.
No traditional IRA age limit — Taxpayers can make contributions at any age as long as they have earned income. Previously, those over 70½ were prohibited from contributing to a traditional IRA.
Tax breaks for special situations — For the 2019 and 2020 tax years, taxpayers may deduct unreimbursed medical expenses that exceed 7.5% of their adjusted gross income. In addition, withdrawals may be taken from tax-deferred accounts to cover medical expenses that exceed this threshold without owing the 10% penalty that normally applies before age 59½ (the threshold returns in 2021). Penalty free early withdrawals of up to $5,000 are also allowed to pay for expenses related to the birth or adoption of a child (regular income taxes apply).
Tweaks to promote savings — Employers must provide participants in defined contribution plans with annual statements that illustrate the value of their current retirement plan assets, expressed as monthly income, received over a lifetime. Some plans with auto-enrollment may now automatically increase participant contributions to 15% of salary, increased from 10%, although employees can opt out.
Access for part-timers — Part-time workers age 21 or older who work a minimum of 500 hours annually for three consecutive years generally must be allowed to contribute to qualified retirement plans starting in plan years beginning on or after January 1, 2021. However, employers will not be required to make matching or nonelective contributions on their behalf.
Benefits for Small Businesses
In 2019, only about half of people who worked for small businesses with fewer than 50 employees had access to retirement benefits.* The SECURE Act includes provisions intended to make it easier and more affordable for small businesses to provide qualified retirement plans.
The tax credit that small businesses can take for starting a new retirement plan has increased. The new rule allows a credit equal to the greater of (1) $500 or (2) $250 times the number of non-highly compensated employees or $5,000, whichever is less. The previous credit amount allowed was 50% of startup costs up to $1,000 ($500 maximum credit). There is also a new tax credit of up to $500 for employers that launch a SIMPLE IRA or 401(k) plan with automatic enrollment. Both credits are available for three years.
Effective January 1, 2021, employers will be permitted to join multiple employer plans (MEPs) regardless of industry, geographic location, or affiliation. “Open MEPs” enable small employers to band together to provide a retirement plan with access to lower prices and other benefits typically reserved for large organizations. This legislation also eliminates the “one bad apple” rule, so the failure of one employer in a MEP to meet plan requirements will no longer cause the others to be disqualified.
Goodbye Stretch IRA
Under previous law, nonspouse beneficiaries who inherited assets in employer plans and IRAs could “stretch” RMDs — and the tax obligations associated with them — over their lifetimes. The new law generally requires a beneficiary who is more than 10 years younger than the original account holder to liquidate the inherited account within 10 years. Exceptions include a spouse, a disabled or chronically ill individual, and a minor child — the 10-year clock will begin when a minor child reaches the age of majority (typically 18 in most states).
In addition to revisiting beneficiary designations, you might consider how IRA dollars fit into your overall estate plan. For example, it might make sense to convert traditional IRA funds to a Roth IRA, which can be inherited tax-free (if the five-year holding period has been met). Roth IRA conversions are taxable events, but if converted amounts are spread over the next several tax years, you may benefit from lower income tax rates, which are set to expire in 2026.
If you have questions about how the SECURE Act may impact your finances, this may be a good time to consult your financial, tax, and/or legal professionals.
*U.S. Bureau of Labor Statistics, 2019
Prepared by Broadridge Investor Communication Solutions, Copyright 2020.
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