The SECURE Act, an acronym for the “Setting Every Community Up for Retirement Enhancement,” was approved by the House of Representatives in May 2019, but stuck for months in the Senate until supporters pushed for the bill to be included in the must-pass year-end 2019 package.
Since its passage, the media and financial world have been abuzz regarding the changes it will have on retirement planning. We feel the changes themselves may only have a limited impact on the average American.
Below we have compiled a list of the important provisions.
1. Increased RMD age from 70 ½ to 72: Previously, retirees with traditional IRAs were required to begin taking distributions from their tax-deferred accounts at age 70 ½. However, now they have the option of waiting an additional eighteen months before they will have to begin drawing down their savings. The new RMD age is now 72.
2. Contributing to Traditional IRAs Past Age 70: The law ends the prohibition on contributing to an individual retirement account (IRA) after 70½. Individuals may continue contributing to an IRA at any age, as long as they have earned income.
Investors over 70½ who have earned income should consider discussing with a Certified Financial Planner whether the new rule permitting ongoing contributions to an IRA makes sense for their personal situation.
3. The End of the Stretch IRA: Before the passage of the SECURE Act, beneficiaries of non-Roth IRAs could limit their tax burden by keeping their IRA assets in an inherited account and slowly withdraw funds over the course of their lifetime. This “strategy” was a popular estate planning tool as it allowed for tax-sheltered growth both during and after the account holder’s lifetime.
Please Note: The SECURE Act does not affect existing inherited accounts. It only applies to accounts that are inherited in Year 2020 and beyond.
Beneficiaries must now liquidate the account within ten years of the original account holder’s passing. There are a few exceptions for spouses, the disabled, minors, and individuals not more than ten years younger than the account holder.
Investors who have estate plans that include leaving retirement accounts to heirs should consider reviewing those plans with a Certified Financial Planner and Estate attorney to determine whether any changes need to be made based on the new law.
4. Using 529 Plans to Repay Student Loans: 529s are college savings plans that allow families to contribute after-tax dollars to grow tax-deferred and can be withdrawn tax-free when the funds are used on qualifying education expenses. In previous years these qualifying expenses included K-12 education and certain college expenses. Now, though, the limits have been expanded to include student loan payments.
5. Penalty-free withdrawals for birth or adoption expenses: New parents can withdraw up to $5,000 from an IRA or an employer-sponsored retirement plan to pay for birth and/or adoption expenses through the first year after the actual birth or adoption. Taxes still need to be paid on pre-tax contributions, but no penalties apply to the withdrawal.
6. Part-time workers can participate in a 401(k) plan: Employees must have worked at least 500 hours a year for three consecutive years in order to be considered eligible.
7. Lifetime income disclosures: The SECURE Act will require the Department of Labor to provide a disclosure to retirement plan participants that will illustrate their projected monthly retirement income based on their current plan assets. It’s designed as a “progress report” to show employees how they are doing on saving.
Please Note: The rule-making process is likely to take a year or more, followed by an implementation period, so it could be Year 2021 or 2022 before this becomes standard.
8. Annuities in 401(k) plans: The new law lowers barriers for offering annuities in employer-sponsored plans, though plans are not required to do so.
9. Provisions to help small businesses: Several provisions in the SECURE Act are designed to make it easier for small businesses to offer retirement plans to their employees, including a provision that will allow unrelated small businesses to group together in so-called “multiple employer plans” to offer a plan to employees.
The changes passed into law under the SECURE Act will undoubtedly have a greater impact on some individuals over others. As your wealth manager, Aventine Financial Group makes it a priority to stay current on any changes that may affect our clients’ financial plans and make recommendations accordingly. If, at any time, you would like to learn more about these changes, we are always available to discuss them with you. Feel free to Contact Us today to schedule your next call.
Always, Frank
Frank J. Fiumecaldo, CFP
Founder & President