With its winter recess looming before it, Congress has engaged in a flurry of activity. Most notably, it reached agreement on a massive government wide spending package titled the Further Consolidated Appropriations Act, 2020. The legislation extends certain income tax provisions that had expired, as well as some that were due to expire at the end of 2019. To the surprise of some, the agreement also includes the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which is the first significant retirement-related legislation since the Pension Protection Act of 2006.
Changes to retirement plans
The SECURE Act is packed with more than two dozen provisions primarily intended to encourage saving for retirement. Most of the provisions take effect January 1, 2020. They include measures affecting both individuals and businesses.
For example, under current law, individuals are prohibited from contributing to traditional IRAs after they reach age 70½, regardless of whether they’re still working. The SECURE Act eliminates that restriction so that anyone can contribute as long as they’re working, matching the existing rules for 401(k) plans and Roth IRAs.
The SECURE Act raises the age at which taxpayers generally must begin to take their required minimum distributions (RMDs) from 70½ to 72. The new rule applies only to those individuals who haven’t reached the age of 70½ by the end of 2019.
The law also includes a new exemption from the 10% tax penalty on early withdrawals from retirement accounts. Taxpayers can withdraw an aggregate of $5,000 from a plan without penalty within one year of the birth of a child or an adoption becoming final.
Less favorably for individual taxpayers, the SECURE Act eliminates the “stretch” RMD provisions that have permitted beneficiaries of inherited retirement accounts to spread the distributions over their life expectancies. This allowed younger beneficiaries to take smaller distributions while growing the accounts and deferring taxes.
Now, most non-spouse beneficiaries must take their distributions over a 10-year period beginning on the deceased’s death. That could increase the tax burden by pushing the distributions into years when the beneficiary is working and in higher tax brackets. The change, therefore, could require some modifications to estate plans, particularly if the plans include trustee-managed inherited IRAs with guardrails to prevent young beneficiaries from quickly draining the accounts.
On the business side, the SECURE Act expands access to open multiple employer plans (MEPs). MEPs give smaller, unrelated businesses the opportunity to team up to provide defined contribution plans at a lower cost, due to economies of scale, with looser fiduciary duties. It also provides tax credits to employers for starting retirement plans and automatically enrolling employees.
In addition, the new law paves the way for employers to include annuities in their retirement plans by eliminating their potential liability when it comes to selecting the appropriate annuity plans. And the SECURE Act requires employers to allow participation in their retirement plans by part-time employees who’ve worked at least 1,000 hours in one year (about 20 hours per week) or three consecutive years of at least 500 hours.
Changes to the laws for retirement savings may require a rethinking of both retirement and estate planning. Contact Lurie Wealth Advisors to help you navigate through the new law changes related to retirement savings.