In an effort to help Americans better save and prepare for retirement, Congress has passed the first pivotal piece of retirement legislation we have seen in over a decade—the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The legislation outlined in this bill will have a demonstrable impact on traditional retirement and estate planning strategies for individual investors and business owners alike, as the changes will affect those with employer sponsored plans as well as participants who hold IRAs.
The following outlines some of the most notable provisions of the SECURE Act and how they could affect your retirement or estate planning strategies now and for the foreseeable future.
Changes to Traditional IRA Distributions and Contributions
Before the SECURE Act, retirees were legally required to begin taking Required Minimum Distributions (RMDs) from their traditional IRAs at age 70 ½. However, individuals can now extend that first mandatory distribution until age 72. While this extension certainly isn’t commensurate with current life expectancies, it is a step in the right direction. Investors who don’t need immediate access to those funds and can keep their tax-deferred dollars invested for an additional 18 months before beginning their draw-down.
Additionally, the act has repealed the age limit for making traditional IRA contributions. Pre-retirees or individuals taking a graduated retirement can now continue to contribute to their non-Roth IRAs for as long as they meet the earned income requirement. Earned income does not include social security benefits, annuity payments, or payouts from other retirement plans. For those looking to bolster their retirement savings in later years, this amendment is a welcomed change.
Elimination of the “Stretch” on Inherited IRAs
For decades, the “stretch” IRA has been an invaluable tax planning tool used by inheritors of IRAs which would allow them to liquidate or transfer funds from an inherited IRA over the course of their lifetime. This practice worked on two fronts: it allowed the inheritor to 1) keep the money invested for as long as possible and 2) spread the anticipated tax burden on distributions out over their lifetime.
With the passage of the SECURE Act, though, non-spouse beneficiaries are required to deplete all funds from the account within 10 years of the owner’s passing, eliminating the “stretch” once taken advantage of by so many. Spouses, the disabled, minor children, and individuals not more than ten years younger than the account holder are exempt from this mandatory 10-year drawdown and can continue to spread their distributions and accompanying tax burdens out over time.
While this is one of the less favorable changes incurred, it was not an uncalculated move on the part of US government. This stretch elimination will allow the US Treasury to receive tax revenue on inherited IRAs sooner and use those to counterbalance additional spending measures of the bill.
Multiple Employer Plans (MEP)
Multiple Employer Plans (MEPs) are retirement plans that allow several employers to participate in the same plan. In the past, these plans were only available to those within the same field or sharing a “common characteristic” in their line of work.
In an effort to get more employers to offer employee-sponsored plans, the Secure act will create Pooled Employer Plan (PEPs) options for employers in unrelated fields. The idea is that this “open-net” option will reduce an employer’s fiduciary liability, cut back on plan costs, and allow them to offer more benefits to their employees.
Tax Credits for Small Business Owners (fewer than 100 employees)
In addition to open MEPs, the SECURE act will grant an annual tax credit up to $5,000 of plan costs for the first three years that an employer offers a workplace retirement plan. This is a tenfold increase over the current $500 credit offered for the first three years! Those who add an automatic enrollment feature can tack on another $500 per year for the first three years for a total tax credit of $16,500 over the first three years the plan is offered.
Part-Time Employee Access
Beginning in 2021, employers must allow employees who work 500 hours in 3 consecutive years to participate in employer-sponsored retirement plans
Safe Harbor for Annuities
Congress is creating a safe-harbor for insurance companies to create guaranteed lifetime income for participants. Annuities will be included in more plans now because the safe harbor will protect fiduciaries.
Lifetime Income Disclosure
In the past, retirement plan sponsors were required to provide participants with periodic statement on their account status and holdings. Beginning in 2021, sponsors will also be required to provide a lifetime income disclosure at least once a year. This disclosure must outline the monthly amount a person would receive in retirement based on their current account balance.
Penalty-Free Withdrawals for Birth or Adoption
Traditionally, individuals who make early withdrawals from a retirement account are subject to a 10% penalty in addition to any taxes incurred. Now for birth or adoption you can take a $5,000 penalty free withdrawal; however, the money is still taxable, so this may not be the most prudent way to cover these expenses.
529 Plan Changes
The SECURE act expands the range for qualified tax-free distributions from 529’s to allow people to pay off student loans up to $10,000.
It isn’t often that we see such profound changes made to the laws governing financial saving for retirement, but when we do, it’s important that we reassess our long-term plans to ensure they will still point us in the direction of our desired destination. Now is the time, in the wake of such change, to review your current financial planning, estate planning, and tax planning strategies for success.
Gary Williams, CFP®, CRPC®, AIF® and Nicholas Ibello, CFP®, AIF® are Wealth Managers with Williams Asset Management. Williams Asset Management is located at 8850 Columbia 100 Parkway, Suite 204, Columbia, MD 21045. They offer advisory services as Investment Adviser Representatives of Commonwealth Financial Network®, a Registered Investment Adviser. Fixed insurance products and services offered by Williams Asset Management. For additional information about the services of Williams Asset Management, please call (410) 740-0220 or email at Info@WilliamsAsset.com. © Williams Asset Management. For more information about Williams Asset Management, please visit http://www.williamsassetmanagement.com/.
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