30
Dec

SECURE Act To Take Effect

SECURE ActCongress enacted a $1.4 trillion spending package on December 20, 2019. The package includes the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The SECURE Act overwhelmingly passed the House of Representatives in the spring of 2019 but stalled in the Senate. The SECURE Act is the most sweeping set of changes to retirement legislation in more than a decade.

 

Many of the provisions offer enhanced opportunities for individuals and small business owners. But there is one big drawback for investors with significant assets in traditional IRAs and retirement plans. These individuals will want to revisit their estate plans to prevent their heirs from potentially facing high tax bills.

 

All provisions take effect on or after January 1, 2020, unless otherwise noted.

 

Elimination of the “stretch IRA”

One change requiring urgent attention is the elimination of the “Stretch IRA.” Suppose a non-spouse beneficiary inherited traditional IRA or retirement plan assets. The “Stretch IRA” let him or her spread required distributions and their taxes over their lifetimes.

The new law now requires the beneficiary to liquidate the inherited account within ten years of the account owner’s death. The beneficiary must be 10 years younger than the account owner for this rule to apply. Exceptions apply if the beneficiary is a spouse, disabled or chronically ill, or a minor child. This shorter distribution period could result in unanticipated tax bills for beneficiaries. This is also true for IRA trust beneficiaries, which may affect estate plans that intended to use trusts to manage inherited IRA assets.

 

Traditional IRA owners may want to also revisit how IRA dollars fit into their estate planning strategy. For example, it may make sense to consider the implications of converting traditional IRA funds to Roth IRAs. Beneficiaries inherit Roth IRAs tax free. Roth IRA conversions are taxable events. But investors who spread out a series of conversions over several years may enjoy the lower income tax rates expiring in 2026.

Benefits to individuals

On the plus side, the SECURE Act includes several provisions designed to help American workers and retirees.

 

  • People who choose to work beyond traditional retirement age will be able to contribute to traditional IRAs beyond age 70½. Earlier laws prevented such contributions.
  • Retirees will no longer have to take required minimum distributions (RMDs) from traditional IRAs and retirement plans by April 1 following the year in which they turn 70½. The new law generally requires RMDs to begin by April 1 following the year in which they turn age 72.
  • Employers generally must allow part-time workers age 21 and older who log at least 500 hours in three consecutive years generally to take part in company retirement plans offering a qualified cash or deferred arrangement. Before, the rule was 1,000 hours and one year of service. (The new rule applies to plan years beginning on or after January 1, 2021.)
  • Workers will receive annual statements from their employers estimating how much their retirement plan assets are worth expressed as monthly income received over a lifetime. This should help workers better gauge progress toward meeting their retirement-income goals.
  • New laws make it easier for employers to offer lifetime income annuities within retirement plans. Such products can help workers plan for a predictable stream of income in retirement. Also, employees can transfer lifetime income investments or annuities held within a plan that stops those investments to another retirement plan. The Direct Transfer avoids potential surrender charges and fees that may otherwise apply.

 

  • Individuals can now take penalty-free early withdrawals of up to $5,000 from their qualified plans and IRAs due to the birth or adoption of a child. (Regular income taxes will still apply, so new parents may want to be cautious.)
  • Taxpayers with high medical bills may be able to deduct unreimbursed expenses that exceed 7.5% (in 2019 and 2020) of their adjusted gross income. Also, individuals may withdraw money from their qualified retirement plans and IRAs penalty-free to cover expenses that exceed this threshold. Regular income taxes will apply. The threshold returns to 10% in 2021.
  • 529 account owners can now use these accounts to repay student loans. The limit is $10,000 over the account owner’s lifetime. 529 funds may also now pay for costs associated with registered apprenticeships.

Benefits to Employers

The SECURE Act also helps employers striving to provide quality retirement savings opportunities to their workers. Among the changes are the following:

 

  • The tax credit that small businesses can take for starting a new retirement plan has increased. The new rule allows employers to 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. The credit applies for up to three years. The earlier maximum credit amount allowed was 50% of startup costs up to a maximum of $1,000 (i.e., a maximum credit of $500).
  • A new tax credit of up to $500 is available for employers that launch a SIMPLE IRA or 401(k) plan with automatic enrollment. The credit applies for three years.
  • Employers may exclude part-time employees for nondiscrimination testing purposes of retirement plans.
  • Employers now have easier access to join multiple employer plans (MEPs) regardless of industry, geographic location, or affiliation. “Open MEPs,” as they have become known, offer economies of scale. They allow small employers access to pricing and other benefits often reserved for large organizations. Under old rule, groups of small businesses had to be affiliated somehow to join a MEP.)The legislation also provides that the failure of one employer in a MEP to meet plan requirements will not cause others to fail, and that plan assets in the failed plan will transfer to another. (This rule is effective for plan years beginning on or after January 1, 2021.)
  • Auto-enrollment safe harbor plans may automatically increase participant contributions until they reach 15% of salary. The prior ceiling was 10%.