The New SECURE Act & How It Could Affect Your Retirement
President Trump signed a new law that has taken effect in 2020 called the Setting Every Community Up for Retirement Enhancement (SECURE) Act. We learned of the potential changes and expected it to pass by the year-end. This includes a lot of changes to retirement accounts that both individuals and business owners should be aware of for their planning needs. It can have significant effects on 401k plan options, spenddown rules when IRAs are inherited, and when you will need to start taking required withdrawals. This is a high-level summary of highlights and shouldn’t be considered a complete analysis.
For individuals, here are a few highlights:
- Retirement Plan investors who did not already turn age 70.5 in 2019 now do not have to take the annual required minimum distributions (RMDs) until age 72.
- College 529 savings accounts may now be used for qualified student loan repayments up to $10,000 (lifetime total) and are now eligible for costs associated with registered apprenticeships.
- Up to $5,000 may be withdrawn from 401(k) accounts without penalty, still subject to taxes, in order to have or adopt a child. It can be repaid to a retirement account.
- Plans may offer qualified disaster distributions without the 10% penalty to investors who live in a presidentially declared disaster area if taken before age 59 .5, and they are permitted to spread taxes on the distribution or repay it over three years.
- The age limit for new traditional IRA contributions has been eliminated, which was 70.5. However, it requires that Qualified Charitable Distributions come from pre-70.5 contributions.
- Elimination of the “Stretch IRA”. One major change and, in our opinion, downside to the law is that inherited IRAs must be spent within 10 years of inheritance regardless of the age of the owner at time of death. If the IRA owner died in 2019, the new law does not apply to the beneficiary. This is a way to increase tax revenues.
Consider when most people inherit an IRA, they could likely be in high income earning years just before retirement, so the IRA spenddown would increase their income, potentially paying out the IRA at higher tax brackets. We think this will have monumental effects to overall retirement and estate planning, such as Roth IRA conversions to make the inherited IRA tax-free.
The exceptions to this rule are spouses, minors, disabled individuals, chronically ill individuals, or beneficiaries within ten years of age to the decedent. If left to a child, when the child reaches age 18, the 10-year period starts.
- The medical expense deduction adjusted back to 7.5% of adjusted gross income for 2019 and 2020.
Business owner key highlights:
- The business tax credit for plan startup costs will increase from $500 to up to $5,000 in certain circumstances. There’s an additional $500 tax credit for three years for plans that add automatic enrollment of new hires.
- The cap on payroll contributions in automatic-enrollment safe harbor plans has increased from 10% to 15% of wages (employees can opt out of the increase).
- Employers must now include long-term part-time workers as participants in retirement plans if they have completed at least 500 hours of service each year for three consecutive years and are at least age 21. These participants can be excluded from safe harbor contributions, nondiscrimination and top-heavy requirements.
- Employers and plan sponsors are now able to include annuities as an option and reduces their liability if the insurer cannot meet its financial obligations. In our opinion, this is a plus for diversified investment options, principal and income guarantees. If the employer drops an annuity, the participant is able to roll the funds out into an IRA, instead of incurring surrender charges.
If you’d like a second opinion on how these new law changes may affect your retirement and estate planning goals, feel free to reach out to Douglas Marion at Advanced Wealth Strategies. Call or text (704) 765-3653 or email Douglas@PlanWithAWS.com. Their local office is conveniently located at 19520 W. Catawba Ave, Suite 313. Their firm will put your best interests as priority.
Source: Congress Bill HR 1994.
congress.gov/bill/116th-congress/house-bill/1994
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