The SECURE Act: What You Need to Know
» Article by Jeffrey Janson, CFP®, AIFA®, Senior Wealth Advisor | Featured in the February 2020 edition of The Rational Optimist™
On Friday, December 20th, 2019, the Setting Every Community Up for Retirement Enhancement Act, aka the “SECURE Act,” was passed into law by Congress, tied to crucial legislation needed to keep the government funded and open.
It was the most impactful piece of retirement legislation passed in the last ten years, and the implications of the Act are just now being parsed, interpreted, and understood by the financial services industry.
While the SECURE Act has instituted some far-reaching changes, we want to make you aware of some of the provisions of the Act and how they may affect you. So, what follows is by no means an exhaustive list; instead, these are just a few of the changes that may commonly affect our clients.
Required Minimum Distributions (RMD’s) will now begin at age 72; not age 70½
To clarify, if you have turned age 70½ before December 31st, of 2019, you will still need to take your RMD (no later than April 1st, 2020). Only those turning 70½ within the calendar year of 2020 or after may elect to wait until age 72 before beginning their RMD’s. If this is confusing, your wealth advisor can help determine if and how you will be affected by this new law.
You may now contribute to your Traditional IRA after age 70½
This new law applies to those taxpayers who have earned income, and the normal IRA funding limits, $7,000 for those aged 70 and above, still apply. Of particular note, this only applies to IRA contributions associated with the 2020 tax year and beyond.
In other words, if you are over 70½, you cannot make an IRA contribution for the calendar year of 2019. However, for those who choose to work post-age 70, this new law allows additional tax-favored savings toward retirement and the tax break that goes with it.
Inherited Retirement Accounts
This new legislation closes a tax loophole used by affluent investors to extend the tax advantages of their IRA across multiple generations of their families by effectively killing the “Stretch IRA” concept. A Stretch IRA was an estate planning strategy that extended the tax-deferred status of an Inherited IRA upon it’s passing to a non-spouse beneficiary.
The stretch strategy enabled an IRA to pass from generation to generation. At the same time, beneficiaries enjoyed the compounding effect of tax-deferred and tax-free growth, all the while only being reduced by the small Required Minimum Distribution (RMD) amount.
The SECURE Act now restricts the amount of time over which distributions must payout to individual beneficiaries to no more than ten years in duration. However, there are still exceptions for spouses, disabled individuals, and individuals not more than ten years younger than the IRA owner.
Expenses for Birth or Adoption
The SECURE Act now allows for penalty-free (not tax-free) withdrawals from qualified retirement plans for birth or adoption costs, up to $5,000. Though not required, it may be re-paid back into the account within a still yet-to-be-determined timeframe.
Changes to Company-Sponsored Retirement Plans
Long-term part-time employees will now be allowed to participate in their company’s 401(k), after one year of service and 1,000 hours worked or three years of service with at least 500 hours worked per year. Under the old rules, many part-timers were excluded from participating in the 401(k) entirely.
For companies that offer a 401(k), and encourage their employees to save in it via automatic enrollment, the safe harbor maximum percentage at which they can start their employee’s deferral has increased from 10% up to 15%.
The company can now also receive a tax credit if they offer auto-enrollment to their employees, thus incentivizing the employer to help their employees save for their retirement.
As you can imagine, having all of these provisions (and many more not listed here!) become law close to the end of 2019 has caused all the custodians (Schwab, TD Ameritrade, and Fidelity) to scramble. Custodians are working hard to update their staff knowledge and software and to accommodate and track all of these new changes to the law.
We will plan to discuss any specific provisions of this tax law change that may personally affect you sometime this year during our regular meeting(s) with you in 2020. In the meantime, if you have any questions regarding the new law before then, please feel free to reach out directly to your Summit wealth advisor. We are happy to assist you!