On the first of January, 2020, most of the provisions within the SECURE Act became law. SECURE is an acronym that stands for Setting Every Community Up for Retirement Enhancement.
The key provisions of the Act from the standpoint of personal financial planning are:
(A) The maximum age for traditional IRA contributions was repealed. Originally, the maximum age was 70 ½.
(B) The Act raises the required minimum distribution (RMD) age from 70 ½, to 72 years of age, before qualified distributions are required to commence.
(C) The Act makes provisions for long term, part time workers to participate in 401(k) plans.
(D) “Stretch” inherited IRA strategies are now all but eliminated.
(E) The Act permits parents to withdraw up to $5,000 from retirement accounts, on a penalty free basis, within one year of birth or adoption for qualified expenses.
(F) The Act allows parents to withdraw up to $10,000 from Section 529 College Savings Plans to repay student loans.
For those who were already taking required minimum distributions in 2019, but would have not turned 72 until the year 2020, or 2021, my advice is that you should continue taking those minimum distributions until the Internal Revenue Services offers further guidance. Also, speak about this matter with your CPA or tax professional.
American are both living longer, and working longer. As a result, for some, the ability to continue making contributions into an IRA beyond age 70 ½ could be of benefit. So long as you’re still working, and have earnings from which deferrals can be made, then you’ll now be able to defer into Individual Retirement Accounts until age 72.
For those who have been precluded from participating in an employer’s 401(k) in the past because they were excluded under the plan’s document for being a part time worker, they may find that under the Act, participation in such plans is now possible. Previously, if you worked less than 1,000 hours per year, you were generally ineligible to participate in a 401(k). Under the Act, with the exception for those covered by collective bargaining agreements, the law requires employers maintaining a 401(k) plan to offer the opportunity to participate to any employee who worked more than 1,000 hours in one year, or 500 hours over three consecutive years.
Previously, if you inherited an IRA, you could “stretch” your distributions and tax payments over your single life expectancy.
Now, for IRAs inherited from the original owner who passed away on or after the 1st of January, 2020, the Act requires that beneficiaries withdraw those assets within 10 years following the death of the account holder. Exceptions to this 10 year rule include distributions for surviving spouses, minor children, disabled persons or those with chronic illness. If you’re a beneficiary of an inherited IRA and the original owner passed away prior to the 1st of January, 2020, then you don’t need to make any changes.
Small business owners are incentivized under the Act to start a qualified retirement plan. The Act provides a start up retirement plan credit for smaller employers (100 or fewer employees) of $250 per non highly compensated employee that is eligible to participate in the plan, up to a maximum cumulative credit of $5,000.
The Act also facilitates the adoption of “MEP” (multiple employer plans) by allowing completely unrelated employers to participate in a MEP, without fear of repercussion under what had been known as the “one bad apple” rule. Now, not all participants in a MEP will face adverse consequences if one of the participants fails to satisfy the tax qualification rules for the MEP.
There are many other intriguing aspects of the Act that could be of benefit to those who participate in qualified plans that feature auto enrollment. Greater requirements of transparency with regard to expenses and amounts of potential income are also stipulated within the Act. For more information about how the provisions of the SECURE Act may be of benefit to you, please either give us a call, or the financial advisor with whom you may have an existing relationship.