On December 20, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was enacted bringing about the most sweeping set of changes to retirement legislation in more than a decade. The most notable changes impact investors who have significant assets in retirement plans and traditional IRAs. A summary of the changes is below.
Inherited IRAs and Qualified Retirement Plan Assets
Prior to the SECURE Act, non-spouse beneficiaries who inherited traditional IRA and retirement plan assets were permitted to spread distributions over their lifetimes, which was known as the “stretch IRA” rule. This rule permitted the inherited IRA or retirement plan beneficiary to potentially minimize tax obligations by spreading out taxable distributions after the death of an IRA owner or retirement plan participant over a long period of time.
Under the SECURE Act, any beneficiary who is more than 10 years younger than the account owner is required to liquidate the account within 10 years of the account owner’s death unless the beneficiary is a spouse, a disabled or chronically ill individual, or a minor child. By shortening the maximum distribution period, beneficiaries will be required to take larger distributions, potentially resulting in unanticipated tax bills for beneficiaries who stand to inherit high-value traditional IRAs. This is also true for IRA trust beneficiaries, which may affect estate plans that intended to use trusts to manage inherited IRA assets.
Owners of a traditional IRA or qualified retirement plan should evaluate how the changes in the SECURE Act will impact their overall estate planning strategy.
On the plus side, the SECURE Act includes several provisions designed to benefit American workers and retirees.
Benefits to Individuals
- People who choose to work beyond traditional retirement age will be able to contribute to traditional IRAs beyond age 70½. Previous laws prevented such contributions.
- Retirees will no longer have to take required minimum distributions (RMDs) from traditional IRAs and retirement plans by April 1 following the year in which they turn 70½. The new law generally requires RMDs to begin by April 1 following the year in which they turn age 72.
- Part-time workers age 21 and older who log at least 500 hours in three consecutive years generally must be allowed to participate in company retirement plans offering a qualified cash or deferred arrangement. The previous requirement was 1,000 hours and one year of service. (The new rule applies to plan years beginning on or after January 1, 2021.)
- Workers will begin to receive annual statements from their employers estimating how much their retirement plan assets are worth, expressed as monthly income received over a lifetime. This should help workers better gauge progress toward meeting their retirement-income goals.
- New laws make it easier for employers to offer lifetime income annuities within retirement plans. Such products can help workers plan for a predictable stream of income in retirement. In addition, lifetime income investments or annuities held within a plan that discontinues such investments can be directly transferred to another retirement plan, avoiding potential surrender charges and fees that may otherwise apply.
- Individuals can now take penalty-free early withdrawals of up to $5,000 from their qualified plans and IRAs due to the birth or adoption of a child. (Regular income taxes will still apply, so new parents may want to proceed with caution.)
- Taxpayers with high medical bills may be able to deduct unreimbursed expenses that exceed 7.5% (in 2019 and 2020) of their adjusted gross income. In addition, individuals may withdraw money from their qualified retirement plans and IRAs penalty-free to cover expenses that exceed this threshold (although regular income taxes will apply). The threshold returns to 10% in 2021.
- 529 account assets can now be used to pay for student loan repayments ($10,000 lifetime maximum) and costs associated with registered apprenticeships.
Benefits to Employers
The SECURE Act also provides assistance to employers striving to provide quality retirement savings opportunities to their workers. Among the changes are the following:
- The tax credit that small businesses can take for starting a new retirement plan has increased. The new rule allows employers to take a credit equal to the greater of (1) $500 or (2) the lesser of (a) $250 times the number of non-highly compensated eligible employees or (b) $5,000. The credit applies for up to three years. The previous maximum credit amount allowed was 50% of startup costs up to a maximum of $1,000 (i.e., a maximum credit of $500).
- A new tax credit of up to $500 is available for employers that launch a SIMPLE IRA or 401(k) plan with automatic enrollment. The credit applies for three years.
- With regards to the new mandate to permit certain part-timers to participate in retirement plans, employers may exclude such employees for nondiscrimination testing purposes.
- Employers now have easier access to join multiple employer plans (MEPs) regardless of industry, geographic location, or affiliation. “Open MEPs,” as they have become known, offer economies of scale, allowing small employers access to the types of pricing models and other benefits typically reserved for large organizations. Previously, groups of small businesses had to be affiliated somehow in order to join an MEP. The legislation also provides that the failure of one employer in an MEP to meet plan requirements will not cause others to fail, and that plan assets in the failed plan will be transferred to another. This rule is effective for plan years beginning on or after January 1, 2021.
- Auto-enrollment safe harbor plans may automatically increase participant contributions until they reach 15% of salary. The previous ceiling was 10%.
EBS is not an accounting or law firm and the foregoing is a general summary of the rules and limitations that may apply to you. It is not intended to apply to all persons and situations and you should contact your tax or legal professional for advice. Please contact a member of the Wealth Management Group to discuss your specific situation.
Data provided has been obtained by third party sources. This data, while believed to be reliable, has not been independently verified by EBS.