What the SECURE Act Means for Retirement PlansSubmitted by MIRUS Financial Partners on January 17th, 2020
The Setting Every Community Up for Retirement Enhancement (SECURE) Act went into effect on January 1, 2020.
This $1.4 trillion spending package includes the most significant set of changes to retirement legislation in more than a decade. While it includes many enhanced opportunities for individuals and small business owners, it does contain a drawback for investors with significant assets in IRAs and some retirement plans.
Here’s a quick overview of what changes to look for as a part of the SECURE Act.
No More "Stretch IRA"
The SECURE Act generally requires beneficiaries who are more than 10 years younger than the account owner to liquidate the account within 10 years of the account owner's death. This means that non-spouse beneficiaries who inherit traditional IRA and retirement plan assets can no longer spread distributions (and tax obligations) over their lifetimes. Often referred to as the "stretch IRA" rule, beneficiaries were able to spread taxable distributions from an inherited IRA over a long period of decades. The SECURE Act eliminates this option. Exceptions may apply if the beneficiary is a spouse, a minor, disabled, or chronically ill.
A shorter maximum distribution period may change the tax burden for individuals who inherit high-value traditional IRAs. If your estate plan includes trusts to manage inherited IRA assets, you may want to check with a financial expert to see how these changes affect your plans.
These changes may motivate some people with traditional IRAs to reevaluate Roth IRAs. However, many exceptions, considerations, and other tax laws apply, so check with a financial expert before making any changes.
Many Benefits for Individuals With Retirement Plans
While some people may experience shifts in tax scenarios, for many Americans, the SECURE Act includes many benefits, including;
Some Part-Timers Can Participate in Company Plans
If employees are 21 and older and work at least 500 hours in three consecutive years, they must be allowed to participate in company retirement plans offering qualified cash or deferred arrangements. This part of the Act goes into effect January 1, 2021.
Penalty-Free Withdrawals for New Parents
Individuals can now withdraw up to $5,000 from their qualified plans and IRAs due to the birth or adoption of a child without incurring penalties. However, this withdrawal will still be taxed.
Longer Contribution Periods
If you choose to work beyond age 65, you will now be able to contribute to traditional IRAs until age 70½.
Required Minimum Distributions Age Pushed Back to Age 72
Retirees have another 18 months before they must start taking required minimum distributions (RMDs) from traditional IRAs and retirement plans. The SECURE Act generally requires RMDs to begin by April 1 following the year in which retirees turn age 72.
More Transparency in Retirement Plan Reporting
Employers must issue annual statements to employees that estimate how much each individual’s retirement plan assets are worth, expressed as monthly income received over a lifetime. This new type of reporting is intended to make it easier for everyone to gauge progress toward meeting their retirement income goals.
New Medical Deductions
If unreimbursed medical bills exceed 7.5 percent (in 2019 and 2020) of an individual’s adjusted gross income, it may be tax-deductible.
More Generous Penalty-Free Withdrawals for Medical Situations
Individuals may withdraw money from their qualified retirement plans and IRAs penalty-free to cover medical expenses that exceed 7.5 percent of their adjusted gross income. Regular income taxes still apply. This is only a one-year provision, and the threshold returns to 10 percent in 2021.
It’s Easier for Employers to Offer Income Annuities
Lifetime income annuities within retirement plans can help employees plan for a predictable stream of income in retirement. Lifetime income investments or annuities held within a plan that discontinues such investments can now be directly transferred to another retirement plan, avoiding potential surrender charges and fees that may otherwise apply.
Use Your 529 Account to Repay Student Loans and More
The SECURE Act allows individuals to use 529 account assets to pay for up to $10,000 in student loan repayments and costs associated with registered apprenticeships.
New Benefits for Employers
The SECURE Act also makes it easier for employers to offer solid retirement plan options for their workforce. New benefits include:
Employers Starting Plans Are Eligible for an Increased Tax Credit
Small businesses that start a retirement plan for employees can 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. This credit can be applied for up to three years.
Employers that launch a SIMPLE IRA or 401(k) plan with automatic enrollment can enjoy a new tax credit of up to $500. The credit applies for three years.
Some Exceptions to Part-Time Participation in Retirement Plans
While the SECURE Act mandates that employers must permit certain part-timers to participate in retirement plans, employers may also exclude such employees for nondiscrimination testing purposes.
Allows for Open MEPs
The SECURE ACT grants employers the access needed to join multiple employer plans (MEPs) regardless of industry, geographic location, or affiliation. Known as "Open MEPs," this change enables small businesses to access pricing models and benefits formerly reserved for large organizations.
High Contribution Ceilings
Auto-enrollment safe harbor plans may automatically increase participant contributions until they reach 15 percent of salary. The previous ceiling was 10 percent.
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