The federal SECURE Act of 2019 and your retirement fund planning

The new federal budget bill signed December 20, 2019, included the SECURE Act, which made changes designed to encourage retirement savings in light of the challenges of the modern work environment – longer careers, longer lifespans and more small-company employers. In light of SECURE, our February article outlined some ways to maximize your IRA contributions. And here we discuss the most significant ways that the Setting Every Community Up for Retirement Enhancement Act may impact your retirement saving strategies.

Mandatory withdrawals now start at age 72

Previously, owners of a 401(k) or traditional IRA had to withdraw required minimum distributions starting at age 70 1/2. Now all taxpayers who turn 70 1/2 after December 31, 2019, can wait an additional 1 1/2 years before taking money out. The age requirement was first applied in the early 1960s and had never been adjusted to account for current increases in life expectancy. “As Americans live longer, an increasing number continue employment beyond traditional retirement age,” the House Committee on Ways and Means said in a summary of the bill. The reason required distributions exist is to help ensure that individuals use their retirement savings during their lifetimes instead of using their retirement plans to transfer wealth to beneficiaries for estate planning purposes.

Inherited IRA & 401(k) – “stretch” eliminated

The SECURE Act eliminated previous rules that allowed non-spouse IRA beneficiaries to “stretch” required minimum distributions from an inherited account throughout the span of their lives. Now all funds from an inherited IRA must be distributed to non-spouse beneficiaries within 10 years of the IRA owner’s death. There are no required minimum distributions for those 10 years, but the entire balance must be distributed by the end of the 10th year. This rule change also applies to inherited 401(k)s and other defined contribution plans with respect to account owners who die after December 31, 2019. An exception applies if the beneficiary is a minor, disabled, chronically ill or less than 10 years younger than the original retirement account owner.

No age restrictions on IRA contributions

The rule that barred contributions to a traditional IRA by individuals older than 70 1/2 was repealed. Now, under SECURE, you may continue to contribute to your traditional IRA beyond age 70 1/2 if you (or your spouse) are still working. With this change the rules for traditional IRAs align more closely with 401(k) plans and Roth IRAs.

401(k)s – for part-time employees

Starting in 2021, employees who have worked at least 500 hours per year for at least three consecutive years are eligible to participate in their employer’s 401(k) plan. However, the part-time employee must be 21 years old by the end of the three-year period, and this new rule does not apply to employees under collective bargaining.

Penalty-free withdrawals for birth / adoption

The SECURE Act allows distributions of up to $5,000 (if married, each spouse may withdraw $5,000) following the birth or adoption of a child without paying the usual 10% early-withdrawal penalty. To qualify, the parent must withdraw the money from a retirement plan (either 401(k) or traditional IRA) within one year from the date the child is born or adopted. Taxpayers must still pay income taxes on the distribution unless the money is repaid into the retirement account at a later date; if this withdrawn amount is recontributed it is treated as a rollover and not included in taxable income. Lawmakers hope this new option will encourage younger workers to start funding 401(k)s and IRAs earlier.

Incentives for small businesses

Beginning in 2021, there are three new laws aimed at encouraging small-business owners to offer retirement plans. First, the maximum credit amount for plan startup costs increased to $5,000 or 50% of costs. Second, there is a new tax credit for small businesses that set up 401(k) or SIMPLE IRA plans that include automatic enrollment. And third, the SECURE Act permits completely unrelated employers to participate in a multiple-employer plan and have a “pooled plan provider” administer it; this allows unrelated small businesses to leverage economies of scale not otherwise available to them, which typically results in lower administrative costs.

Looking ahead – potential future developments

Six states have adopted Automatic IRA programs with promising results, and we may eventually see this trend at the federal level. These plans require all employers in the state that don’t sponsor a workplace retirement plan to automatically enroll employees in an individual retirement account overseen by the state. This could be part of the solution as lawmakers nationally try to solve the retirement plan coverage gap – the large portion of workers in the private sector who don’t have access to a workplace retirement plan.

In July 2019, House Ways and Means held a hearing on a new bill currently called the Social Security 2100 Act, which would aim to extend the solvency of the Social Security program into the next century by increasing payroll taxes on wages over $400,000 and gradually phasing in a payroll tax rate increase. With the future of Social Security uncertain, taxpayers may need to rely on their retirement accounts more than ever.

As always, it is strongly suggested that you discuss your retirement funds and options with your professional advisor to help ensure that your understanding and decisions are your best for your specific situation. Please give us a call if we can help.

* This article is not a complete listing of all the details related to the tax topic and you should contact your CPA for a more detailed discussion regarding these items and how they may apply to your specific situation.