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 a 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 saversLater 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 is a boon for individuals who don't need
the withdrawals for living expenses, because
it postpones payment of income taxes and
gives the account a longer time to pursue
tax-deferred growth. As under previous law,
participants may be able to delay taking
withdrawals from their current employer's
plan as long as they are still working. No traditional IRA age limit. There is no
longer a prohibition on contributing to a
traditional IRA after age 70½ — taxpayers can
make contributions at any age as long as they
have earned income. This helps older workers
who want to save while reducing their taxable
income. But keep in mind that contributions to
a traditional IRA only defer taxes. Withdrawals,
including any earnings, are taxed as ordinary
income, and a larger account balance will
increase the RMDs that must start at age 72. 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 to 10% 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 in both situations. Tweaks to promote saving. To help workers
track their retirement savings progress,
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 until they reach 15% of salary,
although employees can opt out. (The
previous ceiling was 10%.) More part-timers gain access to retirement
plans. For plan years beginning on or after
January 1, 2021, part-time workers age 21 and
older who log at least 500 hours annually
for three consecutive years generally
must be allowed to contribute to qualified
retirement plans. (The previous requirement
was 1,000 hours and one year of service.)
However, employers will not be required to
make matching or nonelective contributions
on their behalf. Benefits for small businessesIn 2019, only about half of people who
worked for small businesses with fewer than
50 employees had access to retirement
benefits.1 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 eligible 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," as
they have become known, enable small
employers to band together to provide a
retirement plan with access to lower prices
and other benefits typically reserved for
large organizations. (Previously, groups
of small businesses had to be related
somehow in order to join an MEP.) The
legislation also eliminates the "one bad
apple" rule, so the failure of one employer in
an MEP to meet plan requirements will no
longer cause others to be disqualified. Goodbye stretch IRAUnder 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
owner 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 child reaches the age of majority
(18 in most states). This shorter distribution period could
result in bigger tax bills for children and
grandchildren who inherit accounts. The
10-year liquidation rule also applies to IRA
trust beneficiaries, which may conflict with
the reasons a trust was originally created. 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. 1) U.S. Bureau of Labor Statistics, 2019 |