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The SECURE Act, which was signed into law at the beginning of the year, introduces new provisions intended to make retirement more secure for people across the country. Investors should be cognizant of the fact that the Act makes significant changes to IRAs, employer-sponsored retirement plans, and some aspects of the tax code, and will likely play a role in retirement planning.
The SECURE Act
At the beginning of 2020, President Trump signed into law the SECURE Act, which stands for “Setting Every Community Up for Retirement Enhancement.” The Act is intended to help both savers and current retirees by updating the laws to make retirement saving easier, more accessible to more of the populace, and more secure. As a result, the legislation will affect nearly everyone in or saving for retirement, but to differing extents.
In this Navigator, we will review some of the most significant changes made by the SECURE Act that may affect your retirement or retirement savings.
New Rules for IRAs
- The stretch provision for heirs was eliminated:
Inherited IRAs and retirement accounts now must be distributed within 10 years, instead of distributed over the beneficiary’s life expectancy. There are no requirements for how the account is distributed during those 10 years, however, so beneficiaries will be able to choose the timing of their distributions. Despite the timing flexibility, this is likely to increase the taxes paid by heirs overall, especially those who will have to withdraw from IRAs during their peak earning years.This rule is only applicable to those accounts of decedents who pass away after December 31, 2019. Some beneficiaries, including spouses, disabled or chronically ill people, individuals who are less than 10 years younger than the decedent, and some minor children, are exempt from the rule.
- Required minimum distributions (RMDs) now begin later:
For those who reach age 70 ½ in 2020 or later, the age at which RMDs begin has increased from 70 ½ to 72 years old. First year RMDs can now be delayed from December 31st of the year the individual turns 72 to April 1st of the following year.
- Traditional IRA contributions can be made later:
Starting in 2020, an individual can contribute to an IRA as long as they have earned income. Previously, contributions were not allowed past age 70 ½. This does not affect RMDs, however, so a 73-year-old with earned income could potentially both contribute to and withdraw from an IRA in the same year.
New Rules for Employer-Sponsored Retirement Plans
- Annuities are now allowed in 401(k) plans:
While previously only available to 403(b) participants, 401(k) plans can now contain annuity and lifetime income options. Before the changes, employers had fiduciary responsibility to make sure that different products were appropriate for employees’ portfolios, but under the new law, insurance companies – which sell annuities – are expected to ensure plan options are appropriate. This is perhaps the most controversial aspect of the SECURE Act, with critics arguing that it is primarily a win for the insurance industry that lobbied for the bill and not necessarily a win for savers.If you have an employer-sponsored retirement plan, we would caution you to carefully assess any forthcoming annuity options before putting any contributions into one. Generally speaking, there is little reason for annuity contributions in an already tax-deferred plan like a 401(k). We have written extensively on fixed annuities and variable annuities in previous Navigators if you would like more information, and we invite you to contact your portfolio manager if you have any questions about annuity options in your own 401(k).
- Tax credits have increased for small business retirement plans:
For business owners with 100 or fewer employees, the tax credit for new retirement plans has increased from $500 to $5,000.
- Benefits for automatic enrollment in 401(k) plans have increased:
Auto-enrollment retirement plans have been shown to increase employee participation, and the Act includes several provisions to encourage the use of these plans. Employers who have established or choose to set up automatic plan enrollment for eligible employees will receive a tax credit of $500 to offset the setup cost of the plan. Additionally, the maximum contribution for automatic enrollment has increased from 10% to 15%.
- Some part-time workers will have access to retirement benefits:
Beginning in 2021, part-time employees who work more than 500 hours in three consecutive years will be able to participate in their employer’s retirement plan. Today, an employee must work more than 1,000 hours per year to participate.
Other Significant Changes
- 529 funds can now be used to cover student loan payments and tuition for apprenticeship programs, which were not approved uses of funds before this year.
- Changes made to the ‘Kiddie Tax’ by the 2017 Tax Cuts and Jobs Act (TCJA) were repealed. Prior to TCJA, children with unearned income received $1,100 tax-free, were taxed at the child’s rate on the next $1,100, and were taxed at the parent’s rate on earnings over $2,200. Under TCJA, income over $2,200 was instead taxed at the trust and estate rates, which could be significantly higher than the parent’s rate. The SECURE Act reverts back to the parent’s tax rate beginning after 2019, and parents can use the new rates for 2019 taxes as well as to amend their 2018 taxes.
- Qualified Disaster Distributions from retirement accounts have increased to $100,000.
- Qualified Birth or Adoption Distributions up to $5,000 will be distributed from retirement accounts without penalty.
- It is now easier for small businesses to pool together in multiple employer plans to offer retirement benefits to employees.
If you have any questions about how the SECURE Act will affect you and your family, please reach out to your Pekin Hardy Strauss advisor.
This article is prepared by Pekin Hardy Strauss,Inc. (dba Pekin Hardy Strauss Wealth Management, “Pekin Hardy”) for informational purposes only and is not intended as an offer or solicitation for business. The information and data in this article does not constitute legal, tax, accounting, investment or other professional advice. The views expressed are those of the author(s) as of the date of publication of this report, and are subject to change at any time due to changes in market or economic conditions. Pekin Hardy cannot assure that the strategies discussed herein will outperform any other investment strategy in the future, there are no assurances that any predicted results will actually occur.
