By Vincent R. Birardi, AIF®, Wealth Advisor at Halbert Hargrove.
The SECURE (Setting Every Community Up for Retirement Enhancement) Act was officially signed into law on December 20, 2019. For individuals, major provisions include providing more flexibility in making contributions to and withdrawals from retirement accounts. The Act also provides increased incentives to business owners to offer tax-advantaged retirement plans to employees and expands eligibility to part-time workers.
This important legislation offers wide-ranging benefits for both individuals and business owners. One significant exception is the Act’s new limitations for beneficiaries who inherit retirement accounts, more details below.
The SECURE Act’s highlights include:
- Required Minimum Distributions (RMDs) will now begin at age 72 (raised from 70½) for individuals who reach age 70½ after 12/31/2019. Qualified Charitable Distributions (QCDs) can still be made from an IRA beginning at age 70 ½.
- The age 70½ restriction for making contributions to Traditional IRAs has been removed, beginning with tax year 2020, if the account owner has earned income during the same contribution year. One caveat is contributions made after 70½ can reduce your QCD allowance. (RMDs will still apply)
- For those saving for their children’s education, the types of tax-free distributions from 529 plans have been expanded to include up to $10,000 of lifetime student debt repayment for the account beneficiary and each of their siblings.
- Parents can withdraw up to $5,000 each, penalty-free, for new birth/adoption expenses from their retirement accounts – think a 401(k) or IRA. (Taxes still apply)
- For many who will inherit IRAs or 401(k)s, much of the “stretch” has been reduced from so-called Stretch IRAs. Formerly, RMD rules for many beneficiaries allowed the beneficiary to stretch out disbursements over their entire lifetime. Now, under the SECURE Act, most non-spouse beneficiaries of inherited retirement accounts are required to fully liquidate the inherited assets within a 10-year period. Exceptions to this limitation include chronically ill or disabled heirs, minor children (only delayed until the age of majority), and those who are within 10 years of age of the original owner. Anyone who has already inherited an account (or if the account owner passed away before 01/01/20) is grandfathered under prior “lifetime stretch” rules.
Taking advantage of the tax benefits of Stretch IRAs for their children or grandchildren had been a popular estate-planning strategy for many higher-income Americans. Prior to the SECURE Act, a beneficiary could count on tax-free growth of the assets in the inherited IRA for potentially many decades. These changes should prompt many to review their estate plan, including retirement account beneficiaries, with their estate planning professional, financial advisor, and/or tax advisor to understand the implications of the new 10-year distribution requirement.
- The SECURE Act allows for the creation of open multi-employer retirement plans. This will go into effect in 2021.
- For small business owners who are establishing a company retirement plan, the tax credit for covering plan start-up costs increases from $500 up to a maximum of $5,000. The credit applies for up to three years.
- If auto-enrollment is included in the employer-sponsored retirement plan, an additional $500 tax credit is extended to the business owner for the first three years.
- As part of an effort to encourage business owners to provide annuities within their qualified retirement plan, the SECURE Act protects employers from legal liabilities, should the product underwriter later become insolvent. This liability protection does not extend to mismanagement issues like excessively expensive or inappropriate products.
- Business owners must allow long-term part-time employees—those who have worked at least 500 hours annually for three consecutive years—to contribute to their own 401(k) account. These part-time employees can be excluded from discrimination testing and application of the top-heavy rules.
For more information or questions, please contact Halbert Hargrove at firstname.lastname@example.org