Amidst all the political unrest, new legislation (aka the “SECURE Act”) swiftly passed during the final weeks of 2019, resulting in some pretty sizable changes for individuals and businesses alike. This post won’t get into every change adopted, but highlights five notable changes for individuals and businesses.
· The Required Minimum Distribution (RMD) age is changing from 70 ½ to 72. RMDs are distributions required (go figure) to be taken from tax-deferred retirement accounts so taxes can be collected after an individual has deferred those taxes throughout his or her lifetime. Prior to the SECURE Act, an RMD was applicable once an individual turned 70 ½ so a calculated portion had to be distributed by April of the following year (at latest). The SECURE act changes this age to 72 which makes for easier math and works to address increasing life expectancies. This is well received by investors because it doesn’t require taking money out of retirement earlier than actually needed.
· There are no longer age restrictions on IRA contributions. Prior to the SECURE act, individuals could not contribute to an IRA after age 70 ½. With this new legislation, as long as one still fulfills the earned income requirement, he or she can contribute past age 70 ½ for continued tax-deferment and savings. As this provides more flexibility, it’s also generally well received.
· A less admired change is the beneficiary rules for IRAs. Prior to the SECURE act, a designated non-spouse beneficiary of an IRA was able to choose a lifetime payout of the account value so depending on his or her age, could span decades. With the implementation of the SECURE act, it will now be required for a designated non-spouse to take the distribution over a span of 10 years. There is flexibility to any desired amount each year within those 10 years as long as the entire account is emptied by that 10th year. For details of designated beneficiaries not subject to this rule or for details about non-designated beneficiaries, speak to your financial adviser.
· Another positive change is the new early distribution rules for adoption or childbirth. Individuals who have adopted and/or had a child qualify for up to a $5,000 withdrawal from his or her IRA within a year of the actual adoption/birth without penalty. Additionally, it’s important to note that each parent can take this amount from his or her own IRA (totaling $10,000 per child) and the parents can pay themselves back and exceed the contribution maximum in years following the early distribution.
· Funds from a 529 college savings plans can be used (up to $10,000 per person) for student loan payments and be used for apprenticeships. This change likely won’t impact a large number of individuals, at least on the 529 side because likely if someone is the beneficiary of a 529, they probably didn’t need to take as many (or any) loans in the first place but it is a welcomed change as it provides more ways to pay down student debt.
· The tax credit for small businesses starting a retirement plan could increase. Currently, the tax credit is a meager $500 for starting a retirement plan the first three years for startup costs. The new tax credit calculation for businesses is: either the $500 credit OR the lesser of $250 x each non-highly compensated employee eligible to be in the plan or $5,000. This is positively received and incentivizes businesses to more seriously consider retirement plans that can benefit the business and its employees.
· There is a tax credit for adopting “Auto Enroll” of $500. Auto-Enroll is a feature of an employer plan whereby the plan itself can default employees into the plan automatically and require the employees to “opt-out” within a certain period. This increases the likelihood of contributions by employees by pure inertia of opting out. Auto-features as a whole have become a popular and effective way to build an employer plan and it’s clear the government is continuing to encourage that behavior.
· The maximum default amount for auto enroll is changing from 10% to 15%. Along the same lines as the previous change for employer plans, this is looking to increase employee deferrals and retirement savings. Prior to the SECURE Act, the default employers could auto enroll their employees is 10% of salary. The SECURE Act changes this amount to 15% and seeks improvement in retirement outcomes for Americans.
· Multiple Employer Plans (MEPs) have become more flexible. MEPs were intended to serve many businesses that were alike and could share economies of scale by operating essentially as one retirement plan for administration purposes. Historically, there had been strict rules for what qualifies multiple employers as “alike” that made it very difficult to take advantage of this set up. There were some changes earlier in 2019 that made it slightly easier to be considered alike and with the passing of the SECURE act, there is now the ability to address the “bad apple” issue. Prior to this legislation, all employers in a MEP were impacted if one employer did something inaccurately or inappropriately for qualification purposes. Now there is a way to address each employer separately and still take advantage of the MEP arrangement.
· Businesses must now include long term, part-time employees for purposes of eligibility of employer-sponsored retirement plans. A long-term, part-time employee means that individual works at least 500 hours for the last three years. This also encourages retirement savings for part-time employees; many of which may not have had this opportunity prior to the SECURE Act. To address concerns around the non-discrimination testing employers must go through, this new legislation allows employers to exclude these employees for testing purposes.
From this financial planner’s point of view, these adjustments seem to work in favor of businesses and individuals’ largely. As with any legislation passed, there are compromises to ensure a balance of economic stimulation and tax collection. Always consult a financial planner and/or tax adviser for your specific situation.
Photo Cred: @kelly_sikkema @unsplash
Hopkins, Jamie. “6 Ways The SECURE Act May Impact Your Retirement.” Forbes, Forbes
Magazine, 31 Dec. 2019, www.forbes.com/sites/nextavenue/2020/12/31/6-ways-the- secure-act-may-impact-your-retirement/#41bbd273672a.
Levine, Jeffrey. “SECURE Act And Tax Extenders Creates Retirement Planning Opportunities And Challenges.” Nerd's Eye View | Kitces.com, Kitces.com, 30 Dec. 2019, www.kitces.com/blog/secure-act-2019-stretch-ira-rmd-effective-date-mep-auto- enrollment/.