Setting Every Community Up for Retirement Enhancement
The SECURE Act of 2019
The SECURE Act was signed into to law in December, 2019, and became effective January 1, 2020.
The comments that follow refer to 401(k)'s and IRAs. In fact, all other retirement plans such as 403(b), 457, 401(a), ESOPs, Cash Balance plans, lump sums from defined benefit plans are included in the legislation.
Individuals
- Participants in 401(k) and other defined-contribution plans (including traditional IRAs) can delay taking required minimum distributions until they reach the age of 72, rather than the prior 70.5.
- Participants are permitted to continue contributing to traditional IRAs even after turning 70.5, which was previously prohibited. There is now no limitation on the maximum age to contribute to an IRA as long as you have earned income.
- Graduate students are permitted to treat stipends and non-tuition fellowship payments as compensation for the purposes of contributing to IRAs.
- Parents can withdraw up to $5,000 from their individual 401(k), similar workplace retirement savings plan, or IRA for each new child in the year of birth without incurring the 10% penalty for taking an early distribution.
- Employers may offer an annuity option as a part of their 401k. Employees who purchase an annuity in their 401(k) can move their annuity to another 401(k) plan at a different employer or to an IRA without paying surrender charges or other penalty fees.
- Heads up: Annuities in a retirement plan can be a good news/bad news story. It creates the framework for people to think about an income stream rather than just a pile of money. But annuities have a well-deserved reputation for being costly and inefficient.
- Qualified Charitable Distributions (QCD) from an IRA remain at age 70 ½. This creates a short window where IRA distributions may qualify as charitable contributions, but not as RMDs.
- Savers in 529 plans may use up to $10,000 to pay off student loans. That's a lifetime max per student.
- Plans can now also be used to pay for the costs of apprenticeship programs.
Inherited IRAs
In the past, non-spouse beneficiaries (usually children or grandchildren) who inherited an IRA could "stretch" payouts from the IRA over their lifetime.
The SECURE Act now requires that disbursements occur within 10 years of the original account holder's death. The effect of this is that it shortens the time in which tax-advantaged accounts can grow and will increase the taxable income of beneficiaries during the ten-year period. This new 10-year rule applies to Roth as well as traditional IRAs even though Roth's are not taxable.
IRAs inherited prior to 2020 are exempt from these new provisions.
The change will not affect these eligible beneficiaries (EBs): (1) the surviving spouse of the deceased owner, (2) a minor child of the deceased owner, (3) a beneficiary who is less than 10 years younger than the deceased owner, or (4) a chronically-ill individual (per definition).
Small Employers
Unrelated small employers can join together to establish a shared 401(k) plan known as a Multiple Employer Plan (MEP). This allows small businesses to pool resources and reduces the costs of establishing a plan.
MEPs existed prior to the SECURE Act, but under the previous law they were required to be related in some way (e.g. through geography or through membership in a common industry or trade association). The SECURE Act waived this requirement.
The law also shields employers who join a MEP from liability for potential misconduct perpetrated by other employers who are in the same plan. In addition, the federal tax credit for defraying plan startup costs is increased from $500 to up to $5,000, and provides an additional $500 tax credit for plans that automatically enroll new hires.
Another provision requires employers to cover long-term, part-time workers starting in 2021. "Long-term, part-time" workers are defined as workers at least 21 years of age who have completed at least 500 hours of service each year for 3 consecutive years.
Employers who offer annuities as part of their defined-contribution retirement plans are shielded from liability under a new safe-harbor provision even if the insurance company selling the annuity commits fraud or collapses.
These summaries were derived from many sources believed to be accurate, reliable, and complete. However, no guarantees can be made in that regard. The IRS routinely publishes "letters" that explain and clarify policy details. They've already done one, here. Please contact us, your tax advisors, or legal counsel if you have any questions.
