Retirement Planning and the SECURE Act
Could the name be anymore awkward? The SECURE Act stands for “Setting Every Community Up for Retirement Enhancement” Act of 2019. The bill is designed to encourage retirement savings in various ways and to simplify administrative requirements in order to make it easier for employers to offer retirement plans. But experts say other tax changes are included that have nothing to do with retirement.
The Act introduces the following changes of special interest to individuals:
• Increases the age after which required minimum distributions (RMDs) from certain retirement accounts* must begin to 72, but this favorable development only applies to folks who reach 70 ½ years after 2019. So, if you turned 70 ½ in 2019 or earlier, you’re not affected. As under prior law, if you’re still working after reaching the magic age and you don’t own over 5% of the employer, you can postpone taking RMDs from your employer’s plan until after you’ve retired. Please note that if you turned 70 ½ in 2019 and have not yet taken your initial RMD for that year, you must take that RMD no later than April 1, 2020, or face a 50% penalty on the shortfall. You must then take your second RMD, which is for the 2020 tax year, by December 31, 2020.
• The bill repeals the maximum age for IRA contributions** (currently 70½). The deadline for making a contribution for your 2019 tax year is April 15, 2020, but you cannot make a contribution for 2019 if you were age 70 1/2 or older as of Dec. 31, 2019. The new law lets you make contributions for tax year 2020 and beyond.
• Reduces Pension Benefit Guaranty Corporation premiums for certain multiple-employer defined benefit plans of cooperatives and charities.
• Allows penalty-free distributions from qualified retirement plans and IRAs for births and adoptions;
• Allows certain home health care workers to contribute to a defined contribution plan or IRA; and
• The Act reduces the amount of deductible charitable IRA contributions allowed to taxpayers over 70½ by the aggregate IRA contribution deductions allowed to them after they turn 70½. Effective for qualified charitable distributions, or QCDs made in a tax year beginning after 2019, the $100,000 QCD limit for that year is reduced (but not below zero) by the aggregate amount of deductions allowed for prior tax years due to the aforementioned Secure Act change. So deductible IRA contributions made for the year you reach age 70 1/2 and later years can reduce your annual QCD allowance.
• Strict rules for post-death required minimum distributions now curtail “Stretch” IRAs. The Secure Act now requires most non-spouse IRA and retirement plan beneficiaries to drain all money inherited accounts within 10 years after the account owner’s death. This makes it difficult for folks to use their IRA balances to set up a long-term tax-advantaged deal for their heirs. The new 10-year rule generally applies regardless of whether the account owner dies before or after his or her RMD required beginning date. The RMD rules do not kick in until age 72 for account owners who attain age 70 1/2 after 2019. So, the RBD for those folks will be April 1 of the year following the year they attain age 72. Also, following the death of an eligible designated beneficiary, the account balance must be distributed within 10 years, and when an account owner’s child reaches the age of majority under applicable state law, the account balance must be distributed within 10 years after that date.
• The new law flatly prohibits 401(k) loans provided through a credit card, debit card or similar arrangement. This change, which takes effect immediately, is designed to prevent easy access to retirement funds to pay for routine or small purchases.
Of special interest to employers –
The SECURE Act will expand access to workplace retirement plans for millions more full- and part-time workers, particularly small business employees. Starting in 2021, the new retirement law guarantees 401(k) plan eligibility for employees who have worked at least 500 hours per year for at least three consecutive years.
The legislation also expands opportunities for workers to obtain guaranteed lifetime income products, and will require that plan participants receive an illustration of how much monthly income their retirement savings will provide, which can help them plan to increase their retirement savings.
The SECURE Act also enhances certain retirement plan features such as automatic enrollment and auto-escalation, sanctioning the ability of employers to enroll employees automatically into a retirement plan at a 6% rate of salary contribution instead of 3%. The provision also includes a safe harbor for employers to increase employee contributions to the retirement plan up to a maximum of 15% of an employee’s annual pay. It allows consolidated filings of Forms 5500, Annual Return/Report of Employee Benefit Plan, for similar plans.
Tax credits that are given to small employers to start a plan and to offer automatic enrollment is a great development.
• First, the new law increases the tax credit available for 50% of a small business’s retirement plan start-up costs. The maximum credit amount is now up to $5,000.
• Second, a new $500 tax credit is created for a small business’s start-up costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment. The credit is available for three years and is in addition to the existing credit described above. The credit is also available to small businesses that convert an existing retirement plan to an auto-enrollment plan.
• Third, starting in 2021, the new law allows completely unrelated employers to participate in a multiple-employer plan and have a “pooled plan provider” administer it, which typically results in lower administrative costs.
CONTACT US: Passage of the SECURE Act is being hailed as a major accomplishment. This is the first major retirement security package in more than a decade. Americans are living and working longer than ever before, and too many have inadequate savings as they enter retirement, or do not have access to a workplace retirement plan. Individuals as well as small businesses will benefit. Retirement planning is not a one size fits all issue. Contact our professionals toll free at 855-534-2727, to discuss the tax implications of the SECURE Act for you and for your small business.
TFG Financial Advisors, LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities, and past performance is not indicative of future results. Investments involve risk and are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here.