If you have significant savings set aside in an IRA, 401(k) plan or similar account, the Setting Every Community Up for Retirement Enhancement (SECURE) Act likely alters your retirement and estate planning strategies. Signed into law in December 2019, the Act changes the rules about contributions to and distributions from these plans, as well as the tax impact on those who inherit them. Let's take a closer look at the highlights of the SECURE Act.
Required minimum distributions
Previous Law
People with traditional IRAs or non-Roth 401(k) plan accounts had to begin required minimum distributions (RMDs) no later than April 1 of the year following the year in which they reached age 70½. If your 70th birthday was June 1, 2019, for example, you had to take your first RMD by April 1, 2020.
New Law
The SECURE Act delays the RMD start date to April 1 of the year following the year in which a person reaches age 72, allowing an additional year or two of tax-deferred growth.
Effective Date
This change applies to people who turn 70½ after December 31, 2019. In other words, if your 70th birthday was before July 1, 2019, the old rules still apply. If you turned 70 on July 1, 2019, or later, you can take advantage of the later RMD start date.
Planning Considerations
If you reached or will reach age 70½ in 2020, you may have previously planned to take an RMD this year. Talk to your ORBA advisor about changing your withdrawal schedule to take advantage of the later start date.
IRA contributions
Previous Law
Contributions to a traditional IRA were not permitted past age 70½. Roth IRA contributions, on the other hand, were permissible at any age so long as the other requirements were met.
New Law
The SECURE Act lifts the age restriction on contributing to a traditional IRA. Now, people who continue to work can contribute to their traditional IRAs regardless of age, so long as the other requirements are met. Keep in mind that, even though a contribution may be permitted, it may not be deductible.
Effective Date
Tax years beginning after December 31, 2019.
Planning Considerations
If you are age 70½ or older and still employed, consider including IRA contributions as part of your retirement savings strategy.
Part-time Employment
Previous Law
Generally, employees who worked less than 1,000 hours per year were ineligible for their companies' 401(k) plans.
New Law
Employers with 401(k) plans (except for certain collectively bargained plans) are required to allow qualifying long-term, part-time employees to participate. To qualify, an employee must: 1) meet the plan's normal eligibility requirements; 2) have completed at least three consecutive 12-month periods of employment; and 3) have been credited with at least 500 hours of service in each of those periods.
Effective Date
This change applies to plan years beginning after December 31, 2020. In addition, employers need not count 12-month periods beginning before January 1, 2021, in determining eligibility. That means employers will not be required to allow part-time employees to participate until 2024.
Planning Considerations
If you work part-time or are considering doing so in the future, assess the impact of this change on your retirement planning strategies.
Inherited IRAs
Previous Law
Spouses who inherited an IRA or 401(k) plan could roll the funds into an IRA in their own name and allow the funds to continue growing on a tax-deferred basis until they begin taking RMDs. Nonspousal beneficiaries were able to place the funds in an "inherited IRA" and stretch RMDs over their life expectancies.
New Law
In one of its few changes that do not benefit taxpayers, the SECURE Act eliminates so-called "stretch IRAs." Now, nonspousal beneficiaries of traditional IRAs or non-Roth 401(k)s must withdraw the funds within ten years (with exceptions for certain minor children, disabled or chronically ill beneficiaries, or beneficiaries who are less than ten years younger than the donor). The Act did not change the treatment of spousal beneficiaries.
Effective Date
Distributions with respect to account owners who die after December 31, 2019.
Planning Considerations
Account owners with nonspousal beneficiaries (including beneficiaries of certain trusts that hold IRAs) should assess the tax impact of an accelerated distribution schedule on their heirs, and determine whether any other strategies could soften the tax blow and help them meet other objectives as well.
Consult Your Advisor
In light of these and other changes made by the SECURE Act, it is a good idea to consult your ORBA advisor to evaluate the Act's impact and revisit (and revise if necessary) your retirement and estate planning plans.
Sidebar: Impact of SECURE Act on employers
If you are a business owner, the Setting Every Community Up for Retirement Enhancement (SECURE) Act includes several provisions that make it easier to offer qualified retirement plans for yourself and your employees. The most significant change is the creation of "pooled employer plans" (PEPs).
PEPs are multiple employer plans (MEPs) available to unrelated employers, allowing them to take advantage of economies of scale to reduce the cost of employer-provided retirement plans. Previously, MEPs were not a viable option for many businesses because: 1) they required participating employers to have a "commonality of interest," such as a common industry or geographic area; and 2) they were subject to a "one bad apple" rule, under which one participating employer's compliance failure jeopardized the entire plan.
The SECURE Act eliminates these requirements, beginning in 2021, making the benefits of MEPs available to far more employers. PEPs will be sponsored by financial services companies, insurance companies and other providers. The Act also increases certain tax credits available to businesses that maintain qualified retirement plans.
Originally Published by Ostrow, December 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
