On December 20th, 2019, President Donald J. Trump signed into law the Setting Every Community Up for Retirement (SECURE) Act, which was tied to the spending bill needed to keep the government open. The SECURE Act provides for the most significant changes to retirement plans in more than a decade. Below is a summary of key changes to retirement plans for retirees and planning tips for navigating the changes.
Elimination of Stretch IRAs
Previously, funds left in retirement accounts to non-spouse beneficiaries at death could be “stretched” out to provide distributions over the life of the beneficiary. After the passage of the SECURE Act, most non-spouse beneficiaries must withdraw all assets held in inherited retirement accounts by the end of the tenth year following the passing of the account owner. Within the ten years however, there are no distribution requirements, which does provide flexibility as to when the distributions are made as long as the entire account balance has been distributed by the end of the tenth year. The new law is effective with respect to retirement account owners who pass away after 12/31/2019. The law still allows “designated beneficiaries” to stretch inherited IRA distributions over their lifetime. Designated beneficiaries include surviving spouses, certain disabled and/or chronically ill individuals, other beneficiaries that are not more than 10 years younger than the (deceased) retirement account owner, and minor children. Minor children must distribute the entire account balance within ten years of reaching the age of majority (typically 18 to 21).
Important note: If you have already inherited an IRA, you will still be able to stretch the distributions as the new rule only applies to deaths after 12/31/2019.
Planning Tips: Owners of large retirement accounts who were previously planning on leaving these assets to beneficiaries in high tax brackets, may consider Roth conversions more attractive now, knowing distributions to beneficiaries are tax-free. If beneficiaries are expected to be in lower tax brackets, although the new 10-year rule does limit the “stretch” IRA, it may make sense to let them take distributions over ten years rather than converting to a Roth IRA, which would require the IRA owner to pay related income taxes up front. Meet with your estate attorney to determine whether any changes need to be made to your beneficiaries, especially if you have a trust named as beneficiary as it could be impacted by the SECURE Act changes.
Increase in Required Minimum Distribution (RMD) Age and Repeal of Maximum Age to Contribute
With the passage of the SECURE Act, the new beginning date for required distributions increased to age 72 from previous age 70 ½. This means the first RMD can be delayed until April 1 of the year following the year of turning age 72. Also, previously employees could not contribute to an IRA after age 70, even if they were working. With the passage of the SECURE Act, there is no maximum age to contribute to an IRA as it was completely repealed beginning for years after 12/31/2019. If you have earned income, you can contribute up to the maximum limit ($6,000 [$7,000 over age 50] in 2020).
Planning Tips: Interestingly, for philanthropic clients with large retirement accounts, the SECURE Act did not change when you can begin making qualified charitable distributions (QCDs). Beginning after age 70 ½, it may make sense to start donating up to $100,000 annually from IRA distributions to charity in order to reduce the size of your retirement accounts set to pass to beneficiaries. Employees working beyond age 70 should consult with their CPA to determine whether contributing to an IRA will result in a net income tax savings.
Small Business Employers and Employees
The SECURE Act eases regulation on small businesses allowing small businesses to pool plans, called multiple employer plans, which reduces the cost and administrative burden to employers in order to be able to offer a retirement plan to more employees.
The SECURE Act increases the tax credit for business owners’ plan start-up costs for the first three years beginning in 2020. The credit is increased from $500 to now the greater of $500 or lesser of (1) $250 for each eligible non-highly compensated employee or (2) $5,000/year beginning after 12/31/2019. The SECURE Act also creates a new $500 tax credit for small businesses that establish retirement plans with auto-enrollment provisions beginning in 2020. The SECURE act also eases the liability to employers to encourage offering annuities in 401(k) plans, which can create income for retirement.
Planning Tips: If you are a small business owner interested in creating a retirement plan for yourself and your employees, be sure to work with your CPA to claim the tax credit. Consider working with a third-party administrator to design the plan to best meet your needs.
Additional Key Changes
The SECURE Act makes numerous changes to retirement law. Among other changes, the SECURE Act provides:
- Increased automatic enrollment deferral percentage for employees in safe harbor 401(k) plans with auto-escalation features from 10% to 15% of compensation after the first year of employment beginning years after 12/31/2019;
- A new exception for penalty-free retirement plan withdrawals of up to $5,000 per individual ($10,000 per couple) for a qualified birth or adoption;
- Revert of the Tax Cuts and Jobs Act “Kiddie-Tax” law change which required children with substantial unearned income to pay tax at the compressed trust tax rates, back to using the parents’ top marginal tax rate;
- Increase the availability of the medical expense itemized deduction to anything over 7.5% of AGI through 2020, rather than the previous 10%;
- Additional opportunities for part-time workers to participate in a 401(k) plan;
- Amounts paid to assist with attaining graduate and/or post-doctoral studies or research, such as a fellowship or stipend, will be treated as compensation for purposes of making IRA contributions;
- If applicable, 401(k) administrators may no longer allow employees to access plan loans via use of credit or debit cards; and
- Beginning in 2020, employers may now adopt plans that are 100% employer funded until their tax return due date, including extensions rather than previously before 12/31;
- Expansion of 529 plan distributions of up to $10,000 (total lifetime) to repay qualified education loans.
Meet with your financial, tax, and/or legal advisors to discuss your financial position, including current retirement and non-retirement assets, beneficiary designations, and how the SECURE Act impacts you. Recommendations may differ depending on your financial scenario.
Disclosure: Beacon Pointe Advisors does not offer legal or tax advice. Please consult with the appropriate tax or legal professional regarding your circumstances. The information set forth herein is for illustrative and informational purposes only and is solely for use only in connection with the purposes for which it is presented. This information is not intended and should not be relied upon as individualized tax, legal, fiduciary or investment advice. Only a tax or legal professional may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement any design discussed herein.