How the SECURE Act Can Help Maximize Your Retirement
Saving for retirement just became easier and more ubiquitous for working Americans. On December 20, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed and became law on January 1, 2020. The aptly named SECURE Act incentivizes small businesses to offer retirement savings plans to employees, which in essence gives more working Americans access to workplace retirement plans.
This article highlights several of the SECURE Act’s provisions which may have tax and estate-planning implications. We encourage you to review the list and contact your financial and/or tax professional to review if/how the changes may impact your financial and retirement plans.
Highlights of the SECURE Act for Individuals
The following provisions were spurred in response to the growing trend that sees more Americans both living and working longer:
- The maximum age for traditional IRA contributions has been eliminated. Individuals can continue contributing to their retirement savings beyond the previous age limit of 70 ½ years as long as they remain in the workforce.
- The required age for beginning Required Minimum Distributions (RMDs) was raised from 70 ½ to 72 years, giving individuals an extra 18 months to grow their IRA balances. This provision applies only to those who turn 70 ½ years old after January 1, 2020. Anyone who is already taking RMDs must continue to do so.
Other notable provisions address the distribution of funds in specific savings plans:
- The lifetime “stretch” provision for designated beneficiaries was eliminated for non-spouse beneficiaries who now must draw down any inheritance within 10 years. The distribution cap eliminates the “stretch” provision under which a beneficiary may choose not to spend the inheritance and instead bequeath it to persons or charities of their choosing. Certain beneficiaries, including the spouse, minor children and disabled beneficiaries, may continue to utilize the lifetime “stretch” feature.
Of all the new and expanded provisions, this one may have the biggest impact on estate planning for high-net wealth individuals and their heirs. Trusted and knowledgeable financial planners, accountants and estate-planning attorneys can help you restructure your investment and retirement portfolio and the distribution of your estate.
- Traditional IRA contributions made after age 70 ½ will impact qualified charitable distributions (QCDs). Individuals age 70 ½ and older can still begin making QCDs of up to $100,000 per year and apply the distributions to their RMD. However, if that person is still making traditional IRA contributions, the amount of the QCD that can be deducted from gross income is offset by the amount of the contribution.
This anti-abuse rule is designed to reduce “double dipping.” If you are currently making QCDs, or intend to, and may continue traditional IRA contributions, you will need to consider the associated tax implications. You should also talk to your financial professional to identify how you can continue making charitable donations using assets outside of your retirement account.
- Union/government employees participating in section 403(b), section 457(b) and other qualified defined contribution plans may now make direct in-service distributions to other investments outside the plan without incurring surrender charges or other fees.
- Distributions from 529 plans can now be used to help cover qualified higher education expenses beyond college tuition, including registered apprenticeships and student loan repayments up to $10,000.
- Individuals can take penalty-free withdrawals up to $5,000 from their retirement plans to help cover certain costs associated with birth or adoption. The provision waives the penalty typically charged for premature retirement plan distributions.
- Long-term part-time workers (those who work 1,000 hours in one year or at least 500 hours per year for three consecutive years of employment) who meet other eligibility requirements can now participate in their employers’ 401(k) programs. This provision is expected to open the door for a range of working populations—among them households that have one spouse who works part-time and even college students who are working their way through school; they can begin contributing at an early age.
Highlights of the SECURE Act on Small Businesses
Given that over 99 percent of the 28.7 million firms in the United States are small businesses,1 the success of the SECURE Act depends largely on its ability to encourage these small businesses to introduce retirement savings plans. To that end, the act includes the following notable provisions:
- Small business owners have multiple incentives to offer 401(k) plans to their employees. First, small businesses can receive start-up plan credits and tax credits for creating or converting 401(k) plans and SIMPLE IRA plans to include automatic enrollment. Additionally, employers can offer employees access to annuities with lifetime income options as an investment choice in their retirement plans.
- The creation of multiple employer plans (MEPs) allows two or more unrelated employers to offer an “open” 401(k) plan to their collective employees. Established under the IRS code and ERISA guidelines, MEPs allow small businesses to share the costs of offering this desirous benefit.
The net effect of the SECURE Act is offering more Americans the ability to save for retirement. The provisions in the act are many, and they may or may not apply to you. The fact is, the average investor or small business owner will likely not digest its many nuances without a professional assessment.
But you’re not in this alone. Contact the MACRO Consulting Group team and we can provide guidance for maximizing the provisions that are unique to your retirement planning and/or small business situation.
1. JPMorgan Chase & Co. Institute: Small Business Data Dashboard. https://www.jpmorganchase.com/corporate/institute/small-business-economic.htm. Accessed February 6, 2020.
SECURE Act And Tax Extenders Creates Retirement Planning Opportunities And Challenges. https://www.kitces.com/blog/secure-act-2019-stretch-ira-rmd-effective-date-mep-auto-enrollment/. Accessed January 10, 2020.
Fidelity Investments. Important Retirement Legislation Has Passed: Understanding the implications of the SECURE Act. https://clearingcustody.fidelity.com/app/literature/item/9897929.html?prgm=1595720&sapl=emailfccsmark&camp=RIASECUREACTEmail01102020&misc=&ssuid=0034100002UFIWAAA5&caud=CRIA&tag=Custody. Accessed February 3, 2020.
Investment Adviser Association. https://www.investmentadviser.org/home
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