The recently passed SECURE Act provides retirement planning opportunities to individuals saving for retirement and businesses offering employees retirement plan options. Also known as the Setting Every Community Up for Retirement Enhancement Act, the SECURE Act was part of a larger government spending package known as the Further Consolidated Appropriations Act, 2020, which includes a variety of tax extenders.
Already approved by Congress in May of 2019, the SECURE Act was stalled in the Senate until it passed at the end of December 2019. It is the first notable piece of legislation focused on retirement planning to be passed since the debut of the Pension Protection Act of 2006 which aimed to safeguard retirement accounts for pensioners while requiring companies which underfunded pension plans to pay higher premiums.
Changes for Both Individuals and Businesses
The SECURE Act contains several provisions that encourage individuals to save for their retirement years and others that allow businesses to take advantage of tax credits while providing employee plans for a reduced cost. In general, most of the incorporated provisions go into effect on January 1, 2020.
Advantageous Individual Retirement Planning Options
Under the prior legislation, once an individual reached the age of 70 ½ they were unable to make contributions to a traditional IRA, even if they were still employed. The SECURE Act makes it easier for those who remain in the workforce in their sunset years to continue to contribute to their eventual retirement by removing the previous restriction. In this way, the SECURE Act effectively works to bring contributions to traditional IRAs in line with the existing rules for 401(k) plans and Roth IRAs.
The SECURE Act also extends the age at which taxpayers must begin taking their required minimum distributions (RMDs) from 70½ to 72, though the new provision applies only to those individuals who had not already turned 70½ by the end of 2019.
For those who welcome a child into their home either by birth or adoption, the law includes a new exemption that allows those families to withdraw a total of $5,000 from a retirement plan without incurring a penalty, so long as the withdrawal occurs within one year of the birth or finalization of the adoption. In these scenarios, the 10% penalty on early withdrawals is not applicable.
Modifications to Required Minimum Distributions for Inherited Accounts
Not all the new provisions are as favorable to the individual taxpayer as the prior legislation allowed. One of the less advantageous areas of change is in how the SECURE Act addresses the schedule for RMDs to be taken on inherited retirement accounts. In the past, younger beneficiaries of inherited plans were able to take smaller distributions over the course of their entire lifetimes in order to grow the accounts while simultaneously deferring taxes.
The SECURE Act alters this by mandating that most nonspouse beneficiaries take their distributions over a 10-year period that begins on the deceased’s date of death. For beneficiaries that are still in the workforce, this could increase their tax burden by forcing the distributions into the years in which they’re still working and are in potentially higher tax brackets. With this in mind, alterations to estate planning may now be necessary, especially for plans that include trustee-managed inherited IRAs for younger beneficiaries.
SECURE Act Retirement Plan Benefits for Businesses
Access to multiple employer plans, or MEPs, were expanded under the SECURE Act. MEPs afford smaller, unrelated businesses the opportunity to join together to offer lower cost defined contribution plans with less strict fiduciary duties. Tax credits are also given to employers for starting retirement plans and automatically enrolling employees.
The SECURE Act also makes room for employers to incorporate annuities into their retirement plans by eliminating their potential liability when it comes to selecting the appropriate annuity plans.
There is good news within the new law for part-time employees, as well. Under the new law, employers must allow part-time employees who have worked a minimum of 1,000 hours during the year or who have worked for 500 hours a year for three consecutive years to participate in their retirement plans.
Because there are so many new provisions inside the SECURE Act that could benefit those who contribute to or provide retirement plans, it is a good idea to review your retirement or estate planning with your UE tax advisor so you are sure to capitalize on the newest benefits.