You may have missed the news – buried in a much bigger spending bill and passed in the thick of the holiday season. But after months of nearly bringing it to the finish line, it’s now official: the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law.
The SECURE Act provides a mixed bag of incentives and obligations for retirement savers and service providers alike. Its intent is to make it easier for families to save more for retirement.
That said, “easier” doesn’t necessarily mean less complicated. The following is an overview of the most significant changes that we see for you (our clients), as the SECURE Act starts rolling out in 2020.
Tax-Favorable Retirement Saving
Compared to previous generations, more Americans are living longer, remaining employed into their 70s, and shouldering more of the duty to fund their own retirement. As such, the SECURE Act includes several incentives to start saving sooner and keep saving longer.
- Initial RMD increases to age 72 – Until now, you had to start taking Required Minimum Distribution (RMDs) out of retirement accounts at age 70 ½. RMDs are then taxed at ordinary income rates. Now, you don’t need to begin taking RMDs until age 72. However, if you turned 70 ½ in 2019 or earlier there is no change; the new rules begin for those turning 70 ½ in 2020. Rules for qualified charitable distributions (QCDs) and Roth IRA withdrawals remain unchanged.
- IRA contributions for as long as you’re employed – If you work past age 70 ½, you can now continue to contribute to either a Roth or a traditional IRA. Before, you could only contribute to a Roth IRA after age 70 ½.
- Expanded participation for long-term, part-time employees – Even if you’re a part-time employee, you may now be able to participate in your employer’s 401(k) plan.
Retirement Plan Restructuring
Even if you are not a business owner, it’s worth being aware that employers in general – and small businesses in particular – are being recruited to help employees save for retirement.
- Higher auto-enroll percentages – If your employer auto-enrolls you in their retirement plan, you are free to opt out. But most of us don’t bother. This usually works in your favor, compared to expecting you to sign up and increase contributions on your own. The SECURE Act now allows employers to continue to auto-enroll you in their plan, and automatically increase your contributions to up to 15% of your pay after the first year (versus a prior 10% cap). Again, you can proactively remove or change your contributions to whatever you’d like, but we often recommend contributing the maximum allowed.
- Additional small-business incentives – The SECURE Act provides a few other tax breaks and credits to help small businesses open and operate employer-sponsored retirement plans for their employees.
An Estate Planning Limitation: Non-Spouse “Stretch” IRAs Mostly Go Away
If there’s an aspect to this bill that is not as popular or well-liked, it’s this one. The reason for this is presumably to offset the expected reduction in federal income tax collections, due to increasing the RMD age to 72. The SECURE Act eliminates the use of stretch IRAs for most non-spouse beneficiaries, which could impact your current or future estate planning.
To be clear, a stretch IRA is not a formal account type. It’s a practice, that enabled you to bequeath your IRA assets to your heirs, who could then keep the inherited account intact and tax-sheltered, essentially throughout their lifetime. With some exceptions, heirs will now be required to move assets out of inherited IRA accounts within ten years after receiving them, thus having to pay taxes on the proceeds much earlier than under the old law.
There are quite a few other components to the SECURE Act. Some of them are aimed at managing access to your retirement savings for pre-retirement spending needs. For example, the SECURE Act now allows parents to withdraw up to $5,000 from their IRA without penalty (but with potential income taxes) for birth or adoption events. It also now prohibits plan providers from allowing participants to take out 401(k) plan loans using credit cards.
Planning for Your Secure Retirement
What can we expect moving forward? Not every component in the SECURE Act is effective immediately. Some may continue to come into sharper focus over time. As such, we may recommend some changes to your financial planning in the near future, while other steps may be required or desired over time. Whatever the case, and as we embark into 2020 together, we’ll ensure that your retirement planning complies with and takes optimal advantage of the SECURE Act of 2019.
As you might expect, all the points above come with detailed exceptions and disclaimers that may influence how they apply to you. Before proceeding, please consult with us, as well as with other appropriate professionals, such as your accountant, and/or estate planning attorney if necessary.