Congress recently passed one of the most significant changes to retirement savings regulation that has occurred in years. The “Setting Every Community Up for Retirement Enhancement or “SECURE Act” as it is known, was included as part of the massive $1.4 trillion spending bill. While the budget is focused on spending, much of the SECURE Act is focused on savings with far reaching implications for pre-retirees, retirees and small businesses. From changes to required minimum distributions (RMDs) to new rules for inherited accounts and small business retirement plans, it is critical for savers to understand exactly how the SECURE Act will impact you in 2020 and beyond.
The RMD age is changing
The new law will increase the age retirees must take distributions from their retirement accounts from 70 ½ to 72. Keep in mind, this new RMD rule will only apply to individuals who turn 70 ½ after December 31, 2019. For example, if a retiree turned 70 ½ in 2019, they would still have to take distributions beginning in 2019 and the new law would not apply.
Elimination of Stretch IRAs
Under current rules, individuals that inherit an IRA can choose to distribute these assets slowly over their lifetime. This strategy is called the “Stretch IRA” because beneficiaries keep the bulk of their inherited IRAs growing tax deferred while they stretch distributions over their lifetime. The SECURE Act will now require that inherited IRAs be distributed within 10 years. While there are exceptions that apply to spouses, disabled individuals, minor children and beneficiaries that are less than 10 years younger than the decedent, this change may create significant estate and tax planning implications for other types of beneficiaries. Keep in mind, this change only applies to retirement accounts inherited after 2019 and does not impact existing inherited accounts.
Current rules do not allow for contributions to IRA accounts after age 70 ½. Under the new law, individuals with earned income will be able to continue to contribute to their IRA after age 70 ½. This change may help workers that have chosen to delay retirement in order to continue to build their retirement nest egg.
Retirement account withdrawals for birth or adoption expenses
New rules will allow parents to make penalty-free withdrawals of up to $5,000 from their retirement account for expenses associated with birth or adoption. This will apply through the first year after the birth or adoption. While income tax will still have to be paid on pre-tax contributions that are withdrawn, no penalties will apply to the withdrawal, potentially saving parents 10%.
The SECURE Act will allow for up to $10,000 of distributions from 529 plans to be applied to student loans. Rather than an annual limit, $10,000 is the lifetime limit for each 529 plan beneficiary. Keep in mind, the portion of student loan interest that is paid for with tax-free 529 earnings is not going to be eligible for the student loan interest deduction.
According to www.savingforcollege.com, the expansion presents an opportunity for grandparents who want to help a grandchild pay for college without affecting financial aid eligibility. Distributions from a grandparent-owned 529 plan are considered untaxed student income on the Free Application for Federal Student Aid (FAFSA) and can reduce a student’s financial aid package by up to 50% of the value of the distribution. Grandparents can avoid this by waiting until January 1 of the student’s sophomore year of college (when it will no longer affect untaxed income on the FAFSA) to take a 529 plan distribution or wait until the student graduates to pay down their student loans.
Business retirement plan benefits
The SECURE Act offers a few provisions aimed to incentivize small businesses to establish retirement plans for their companies and employees. First, the SECURE Act will provide an annual tax credit of up to $5,000 toward administrative fees for the first three years that an employer offers a workplace retirement plan for their employees. (The previous credit was $500 per year.) In addition to a maximum tax credit of $15,000, new rules will encourage the development of Multiple Employer Plans (MEPS). MEPS allow small businesses to pool their resources to simplify the administration of retirement plans. The hope is that this change will increase the number and quality of retirement plans provided in the workplace.
Under new rules, employers will be required to include part-time workers in defined contribution plans as long as they are age 21 and have completed at least 500 hours of service for 3 consecutive years. Previous rules allowed plans to exclude those that worked less than 1,000 hours in a 12-month eligibility period.
Expanded vehicles within a 401(k) plan
Finally, the SECURE Act also makes it possible for 401(k) plans to offer annuities as part of their investment options. While this is not a requirement, it simply eliminates the regulatory barrier that previously existed.
The SECURE Act creates many planning opportunities for individuals, families and businesses and it is important to understand how these new rules may impact your financial life. Since everyone’s financial situation is unique, consider speaking to your financial, tax and legal advisers to determine the most appropriate approach and strategy for you.
Kurt J. Rossi, MBA, CFP®, CRPC®, AIF® is a CERTIFIED FINANCIAL PLANNERtm Practitioner & Wealth Advisor. He can be reached for questions at 732-280-7550, kurt.rossi@Independentwm.com,www.bringyourfinancestolife.com & www.Independentwm.com. LPL Financial Member FINRA/SIPC.