By Boyce F. Lowery, CLU, ChFC
On December 20, 2019, the president signed into law the Setting Every Community Up for Retirement Enhancement (SECURE) Act. This is the first major retirement reform since the Pension Protection Act of 2006. Its provisions will affect nearly every American in the areas of retirement, estate, and tax planning. Here are the major retirement reforms and how they will affect you.
Required Minimum Distributions (RMDs)
In the past, once a person reached age 70½, they had to begin to take withdrawals from their retirement accounts (except for Roth IRAs). The new law changes the age that requirement goes into effect to 72. However, anyone who turned 70½ prior to January 1, 2020, is still subject to the old rules and required to take RMDs.
Under the old law, RMDs were required from inherited IRAs, but they were calculated to drain the account over the heir’s entire lifetime. The new law requires that inherited accounts are emptied within 10 years of the original account owner’s death. There aren’t any requirements as to how much must be taken out each year, though, as long as the account is completely distributed after 10 years.
The new rules do not apply to spouses and disabled individuals. Minor children of the original account owner are exempt from the new law until they reach the age of majority. At that point, they have 10 years to empty the account.
These new provisions can cause problems for those with a “pass-through” trust as the beneficiary of their IRA. The wording that is commonly used in these trusts, under the new law, will make it difficult for heirs to access the money until the 10th year, when the entire account is distributed at once, which can cause tax problems. If you have a trust as the beneficiary of an account, you should review it with an estate planning attorney.
IRA Contribution Restrictions
The new law allows contributions to traditional IRA accounts past age 70½ for those that are still working, bringing it into alignment with the rules for other retirement accounts. This opens the door for more strategic financial planning and backdoor Roth conversions later in life.
It also helps graduate and postdoctoral students. Previously, taxable stipends and non-tuition fellowships were included as taxable income but did not count as compensation to allow students to contribute to an IRA. Under the new law, those payments now make the students eligible to make IRA contributions.
The law also made the same changes for “difficulty of care” payments made to foster care providers. Such payments are now considered a basis for IRA eligibility and contributions.
Access to & Investments in Retirement Accounts
More people now have access to 401(k) plans and plan participants now have more options. Usually, workers who hadn’t worked at least 1,000 hours in a year were not allowed to participate in their company’s 401(k) plan. Starting in 2021, anyone who has worked at least 500 hours for at least 3 consecutive years and has reached age 21 will be eligible to participate. This does not apply to workers with collective bargaining agreements.
The new law also makes it easier to purchase annuities inside 401(k) plans. This can help provide a more guaranteed income in retirement. However, it was made possible by removing or lessening some fiduciary requirements to vet insurance companies and products, so you should exercise caution if you go that route.
Adoption & Birth Expenses
Penalty-free withdrawals can now be taken from retirement accounts to cover qualified birth and adoption expenses. Up to $5,000 can be withdrawn per parent per birth/adoption. The withdrawal must be taken after the birth or adoption, but it can be used to cover expenses incurred prior.
Small Business Plan Sponsors
The new law also makes it easier and more appealing for small business owners to sponsor retirement plans. Starting in 2021, small businesses will be able to join together with other unrelated businesses in “multiple employer plans” to leverage economies of scale and keep their costs down. Businesses will also be able to establish some retirement plans later as the deadline to do so has moved from December 31 to the due date of their federal tax return.
To incentivize small employers to offer retirement plans, previous law allowed employers to receive a tax credit of up to $500 per year for three years for sponsoring a retirement plan. Now they can get up to a $5,000 tax credit per year for three years for sponsoring a retirement plan as long as at least 20 non-highly compensated employees are eligible to participate. In addition to that tax credit, a credit of $500 a year for three years is also available for employers who use an automatic enrollment feature. The total tax credits available over three years is now $1,650.
What You Should Do in Response
As you can see, these new laws are broad and deep in how and who they affect. Your financial life and retirement plan will likely be affected in multiple ways. This article covers the provisions of the law that are most far-reaching, but it is not comprehensive.
Now is a good time to meet with a financial professional to review your retirement plan and check to see if any updates should be made in light of these legislative changes. After all, if your goal is to pass wealth on to the next generation, then an IRA is no longer a good way to do it, and life insurance may be a much better option. Or, if your IRA is set up to go to a trust or your children, it might be better to have your spouse as a beneficiary or to pass much of it to charity. With all these changes, now is the time to act. If you want to make sure your retirement plan is optimized going forward, call us at 888-827-0146.
Boyce Lowery is a 40-year veteran and established expert in the insurance industry. As the managing partner of Suncrest Advisors, he, his partner, and their associates all aim to provide financial security and peace of mind to business owners, executives and professionals, and high net-worth individuals across the United States. Along with more than four decades of experience, Boyce is a Chartered Life Underwriter® (the premier designation for insurance professionals signifying specialized knowledge in life insurance and estate planning) and a Chartered Financial Consultant® (known as the advanced financial planning designation). To learn more, visit https://suncrestadvisors.com/ or connect with Boyce on LinkedIn.