For the first time in over a decade, Congress has pushed through significant measures to help millions of Americans save more toward retirement. The Setting Every Community Up for Retirement Enhancement Act, better known as the SECURE Act, was signed into law by President Donald Trump on December 20, 2019 and went into effect on January 1st, 2020. It provides many changes aimed at increasing access to tax-advantaged accounts and helping to prevent older Americans from outliving their assets.
It is important to have a good understanding of what is in the new law and how it could affect your retirement savings accounts. Here are a few of the key provisions of the SECURE Act.
Major Changes to Individual Retirement Accounts (IRA’s)
One of the more notable changes is the removal of the age cap on making a contribution to a Traditional IRA. Previously, individuals were prohibited from making contributions to a Traditional IRA starting in the year they turn 70 ½. Starting in 2020, an individual with earned income can continue to contribute to a Traditional IRA, similar to the existing rules for a Roth IRA. This is a huge step for retirement savers, especially as people are working longer.
Not only are people working longer, Congress also recognized that people are living longer as well. As a result of the increase in life expectancy, the beginning date for taking minimum required distributions (RMD’s) from your Traditional IRA has now increased from age 70 ½ to 72. (Note: The required minimum distribution start date change only applies to individuals that had not reached age 70 ½ by the end of 2019.)
Changes to Non-Spouse Beneficiary Inherited IRA’s
Since 2012, Congress has made various attempts to limit non-spouse beneficiaries from “stretching” out an inherited IRA over their lifetime while continuing to allow the Inherited IRA to grow on a tax-deferred basis. This benefit was magnified with younger beneficiaries. The SECURE Act eliminates this stretch. Instead, most beneficiaries must fully withdraw the balance within 10 years. By accelerating the taxation of the Inherited IRA, individuals will not only pay taxes faster, but the increased distribution amounts could lead the individual to owe a greater amount of taxes in that year. The IRS has projected that removing the stretch-out provision for a non-spouse beneficiary will generate over $2 billion in tax revenue in 10 years.
There are exceptions that allow certain “Eligible Beneficiaries” to avoid the 10-year rule. Some of those include: spouses, minor children, disabled persons and chronically ill persons.
Changes to Employer Retirement Plans
Many of the changes resulting from the SECURE Act focus specifically on employer retirement plans and increasing accessibility for retirement savers. Now the rules are more flexible, and a participant can be admitted to a plan if they meet the 1,000 hours of service minimum in a single year, or if they have at least 500 hours of service annually in three consecutive years.
Another notable change in the retirement plan space from the SECURE Act is the additional language it has provided around pooled retirement plans. The barriers and costs to starting a retirement plan can be significant and one option now available is to allow multiple small businesses to share in a single plan, helping to add scale and making administration more affordable. The bill further outlines the protection offered to each employer, in the event one of the other employers in the plan does not conform to the rules. There are other provisions in the bill that benefit small business retirement plans so you will want to go over all of the changes in more detail.
Financial Planning – Estate Planning and Wealth Transfer
There are many areas to consider, or reconsider, in financial planning with the recent tax law changes (which expire in 2025) and now the passing of the SECURE Act. Incorporating strategies such as Roth conversions at a lower taxation rate, using life insurance for tax efficient transfer of wealth and effective utilization of trusts are all critical parts of wealth preservation and estate planning. True financial planning is interpreting the ever-changing landscape in multiple areas and proactively developing strategies to maximize the benefits from those changes. Feel free to contact me with any questions regarding wealth management or the SECURE Act.
The Wolfe Kobes Group
Baird Private Wealth Management