On December 20, 2019, President Trump signed “The Further Consolidated Appropriations Act of 2020,” which includes provisions of the SECURE Act (Setting Every Community Up for Retirement Enhancement).
It is the most sweeping retirement plan legislation that we have seen in recent years. The new law contains many bipartisan reforms with the intent of increasing access to workplace retirement plans and expanding taxpayer options for retirement savings. Many of the provisions go into effect in 2020, which means now is the time to consider how these new rules may affect your tax and retirement-planning situation.
There are many provisions in the law that offer enhanced opportunities for individuals and business owners. There is also one notable drawback for individuals with significant assets in traditional IRAs and retirement plans. These individuals will likely want to revisit their estate-planning strategies to prevent their heirs from potentially facing unexpectedly high tax bills.
“Many of the provisions go into effect in 2020, which means now is the time to consider how these new rules may affect your tax and retirement-planning situation.”
We have provided highlights including the most impactful provisions below:
Elimination of the “Stretch IRA”
Perhaps the change requiring the most urgent attention is the elimination of long-standing provisions allowing non-spouse beneficiaries who inherit IRAs and retirement plan assets to spread distributions (and therefore the tax obligations associated with them) over their lifetimes.
This ability to spread out taxable distributions after was often referred to as the “stretch IRA” rule. The new law generally requires beneficiaries to withdraw the funds 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.
This shorter maximum distribution period could result 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.
IRA owners may want to revisit their overall planning strategies around IRAs. Those who inherited an IRA prior to 2020 may continue to use their current distribution schedule.
SECURE Act Benefits to Individuals
On the plus side, the SECURE Act includes several provisions for the benefit of individuals:
- Individuals will be able to contribute to traditional IRAs beyond age 70½ as long as they continue to work. Previous laws prevented such contributions.
- Retirees will no longer have to take required minimum distributions (RMDs) from their retirement accounts 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.
- Long-term, part-time employees can participate in retirement savings. The Act defines these individuals as “employees who work at least 500 hours in 3 consecutive 12-month periods and have reached age 21.” 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.)
- Participants will receive statements at least once annually from their employers estimating how much their retirement plan assets are worth, expressed as monthly income received over a lifetime. This should allow workers to be able to gauge progress toward meeting their retirement income goals.
- 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.
- Historically, qualified higher education expenses under Section 529 have included tuition, fees, books, supplies, equipment and in some cases, room and board. This has been expanded to include educational expenses required for participation in certain apprenticeship programs. In addition, a taxpayer may take tax-free distributions of up to $10,000 to pay the principal or interest on qualified student loans.
“Individuals will be able to contribute to traditional IRAs beyond age 70½ as long as they continue to work. Previous laws prevented such contributions.”
SECURE Act Benefits to employers
The SECURE Act also provides changes to make it easier and less costly for employers striving to provide quality retirement savings opportunities to their workers. Among the changes are the following:
- The automatic enrollment default for safe harbor plans increases from 10% to 15%.
- The tax credit for Small Employer Pension Plan Start-Up Costs 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.
- 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.
- Employers now have easier access to join multiple employer plans (MEPs) regardless of industry, geographic location, or affiliation. (Previously, groups of small businesses had to be affiliated somehow in order to join a MEP.) In addition, the failure of one employer in an MEP to meet plan requirements will not cause others to fail, and the 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.)
This article is a high-level overview of the SECURE Act and its provisions. To read a full summary of the SECURE Act you can read H.R.1994 – Setting Every Community Up for Retirement Enhancement Act of 2019 or read the Act in its entirety here.
What should you do?
These new provisions should be reviewed and considered in your retirement and tax planning. However, the application of these rules can be complex and expert assistance is recommended.
We can help you navigate these changes. If you have questions about this call Shannon & Associates today at (253) 852-8500 or contact us and we’ll be in touch.
By Julie Courtney