2020 brings a number of changes to IRA and retirement plans as a result of the SECURE Act, signed into law in late 2019. The changes are broad, impacting virtually everyone, whether you’re a student, younger, older, preparing for retirement, in retirement, an employee or an employer. Here are the top aspects you need to know about how the SECURE Act affects you.
Delayed RMDs Until Age 72
Required minimum distributions (RMDs) from IRA, 401(k) and other qualified retirement plans have historically been required in the year in which you turn 70 1/2 (unless you continue working beyond this age, and don’t own 5% or more of your company.) The SECURE Act pushes this required age to the year in which you turn 72. This is a win for retirees as it gives you an extra year and a half before you’re forced to receive taxable distributions from your retirement accounts.
Note: If you turned age 70 ½ before January 1, 2020, the old RMD rules still apply to you.
Extended Retirement Savings Post Age 70 1/2
Recognizing that people are working longer, and that many older Americans need additional retirement savings, the SECURE Act repeals the rule that previously prohibited individuals age 70 ½ or older from making IRA contributions. Under the new law, no age restrictions apply. Please note that income and earning limits do still apply.
Grad Student IRA Contributions
Grad students, parents and grandparents have often looked for ways to kick off retirement savings for students. However, until now, students were required to have employment earnings to enable such contributions. The SECURE Act paves the way for students to make IRA contributions with the ability to contribute amounts paid to them in support of graduate, post-doctoral or research studies, such as receipt of fellowships or stipends.
Birth Or Adoption Related Penalty Free Withdrawals
Parents welcoming a child by birth or adoption can now withdraw up to $5,000 per parent from their 401(k), IRA or other retirement plan, without paying a 10% early-withdrawal penalty. (However, you’ll still owe income taxes on the amount withdrawn.) Such penalty-free withdrawals are permitted within one year of the date your child is born or the adoption is finalized. Please note that early withdrawal penalties still apply if you’re adopting your spouse’s child.
Repeal Of The ‘Stretch’ IRA
While the new law includes a number of tax-friendly provisions, there is one significant drawback. It’s less tax-friendly to your heirs. The SECURE Act eliminates the ability for non-spouse IRA beneficiaries to ‘stretch’ RMDs over their lifetime from an inherited IRA account. The new law requires all such inherited IRA assets to be distributed within 10 years of the IRA owner’s death.
Current beneficiaries of inherited IRAs will retain the old rules allowing them to ‘stretch’ distributions over their lifetime. However, the beneficiaries of anyone who dies in 2020 or beyond will be subject to the new rules.
1. The 10-year distribution rule does not apply to a spouse named as the beneficiary of an IRA.
2. Distributions may still be ‘stretched’ over the life or life expectancy of a non-spouse beneficiary if the individual is a minor, disabled, chronically ill or not more than 10 years younger than the deceased IRA owner. This exception only applies to minors until they reach the age of majority, at which time the 10-year rule applies going forward.
Important Estate Planning Note
If your estate planning documents include Trust provisions to hold IRA assets for a beneficiary, careful review of your documents is required. Some documents are written to only allow the distribution of RMDs. Now that annual RMDs are not required (transitioning to a liberal distribution strategy over 10 years), the Trustee might not have the ability to stretch distributions over 10 years, possibly resulting in a lump sum taxable distribution in the 10th year.
Important Company Retirement Plan Changes
The SECURE Act brings a swath of important changes to company retirement plans. If you’re an employee or an employer, you should be aware of the following:
Eligibility For Part-Time Employees
Most retirement plans have historically limited employee participation potential to employees who have worked at least 1,000 hours during the calendar year. Starting in 2021, the new law requires retirement plan eligibility for employees who have worked at least 500 hours per year for at least 3 consecutive years, assuming they’re at least age 21 by the end of the 3-year period.
Expanded 401(k) Employer Auto Enrollment Capabilities
Companies have the ability to auto enroll employees into their 401(k) plans to help boost plan participation and employee savings. Prior to the SECURE Act, the “qualified automatic contribution arrangement” (QACA) was limited to 10% for any year. The SECURE Act increases this threshold to 15% of earnings, with the exception of the employee’s first year of participation. Employees always have the ability to opt out of automatic enrollment.
Annuity Information and Option Requirements
Employers and 401(k) plan administrators will soon be required to provide annual “lifetime income disclosure statements” to plan participants. Such statements will show how much money each participant could receive monthly if their full 401(k) balance was used to purchase an annuity. Such statements will be for illustrative purposes only. These requirements will go into effect one year after the IRS issues interim final rules, establishes a model disclosure statement or releases assumptions that plan administrators can use to calculate annuity equivalents, whichever is latest.
Furthermore, the SECURE Act broadens the ability for plans to offer annuity options to participants, which can now be made portable to participants without incurring surrender charges.
No More Credit Card Loans
Some 401(k) plans allow participants to take loans from their retirement accounts. The SECURE Act now strictly prohibits such loans to be accessed by using credit or debit cards.
Small Business Owner Retirement Plan Assistance
Many small business owners don’t offer retirement plans due to the costs and complexity that they entail. The SECURE Act offers three benefits intended to increase retirement plan offerings by small business owners:
1. Start-Up Tax Credit: The new law increases the tax credit limit covering up to 50% of a small business’s retirement plan set-up costs to $5,000 (as compared to the prior credit threshold of $500).
2. Auto Enrollment Tax Credit: In addition to the above, a new $500 tax credit is now available to small businesses that set up 401(k) and SIMPLE IRA plans that include automatic enrollment.
3. Pooled Plans Among Employers: Starting in 2021, the SECURE Act will allow unrelated employers to participate in multi-employer plans, allowing one administrator to oversee a pooled plan. This is intended to help reduce plan administrative costs.
SageVest works closely with individuals, families and business owners to help develop financial strategies, including retirement planning for themselves, their loved ones and their employees. Please contact us for more information on how the SECURE Act might affect your personal retirement or business strategic plan.