HOW WILL THE SECURE ACT
AFFECT YOUR RETIREMENT
AFFECT YOUR RETIREMENT
Chances are that you’ve heard of the recent passing of the SECURE Act, as it has been receiving a lot of coverage from news outlets. While some of the basic changes that it addresses have been mentioned, there has been little discussion regarding the specifics, and even less regarding the implications the changes can have on your long-term financial plan.
At Moore Wealth we strive to educate people so that they can feel empowered when it comes to making financial decisions, and are able to ask the right questions when speaking to professionals. With that in mind, we’ve broken down some of the aspects of the SECURE Act that we see as the most important to be aware of.
- The SECURE Act has pushed the age for Required Minimum Distributions (RMDs) from Traditional IRAs from 70 ½ to 72. An important note for this change is that it only applies to people who will turn 70 ½ in 2020 or later.
- Contributions to Traditional IRAs are no longer prohibited after age 70 ½. Prior to the SECURE Act passing, once an individual reached RMD age, they were unable to contribute to a Traditional IRA. Now, contributions can continue indefinitely as long as the individual is working and has earned income.
- The “Stretch IRA” has been replaced with a 10-year withdrawal rule. Prior to the passing of the SECURE Act, an inherited IRA could be withdrawn over the lifetime of the beneficiary, but this is no longer the case. For any IRA that is inherited after December 31 st , 2019, the total balance of the IRA must be distributed to the beneficiary by the end of the 10 th year after the death of the original owner.
- Qualified Charitable Distributions (QCDs) are still allowed beginning at age 70 ½. While RMDs have been pushed back to starting at age 72, the ability to make charitable contributions directly from your IRA to a specific charity has not changed. While it will not count towards an RMD prior to age 72, individuals can still make QCDs up to $100,000 per year starting at age 70 ½
- A number of provisions to encourage the use of retirement plans in small businesses. Among the changes are increased tax credits for establishing a 401(k) and for adopting auto-enrollment, greater access to plans for part-time employees, a reduction in barriers to establishing Multiple Employer Retirement Plans, and increases in the maximum contribution percentages allowed for auto-enrollment.
At face value, most of the changes made by the SECURE Act are beneficial to the general public. However, there are details that will affect financial planning strategies that were employed based on previous laws. Areas that will be most impacted include: retirement income planning, legacy planning, and business planning.
The Specifics and Implications
1. Pushing back the age to start RMDs is certainly a good thing, especially considering that people are living longer than ever before. However, since money in Traditional IRAs now has longer to grow without distributions, this does create an increased probability of having very large RMDs and potentially creating unfavorable tax situations. While a year and a half may not seem like very long, it is long enough to warrant re-evaluating your retirement income strategy.
2. The replacement of the “Stretch IRA” with a 10-year distribution rule has a number of substantial implications when it comes to legacy planning. The biggest issue with this new rule is that beneficiaries of relatively large IRAs could be subject to very large tax bills. This becomes a particular disadvantage since most IRAs are inherited during peak earning years, which means the distributions will be taxed at what could be an individual’s highest lifetime rate.
For individuals who have set up “See Through Trusts” as the beneficiaries of their IRAs, the problem above can compound even further depending on the language of the trust. Often, these trusts are set up to limit the amount of money that a beneficiary can remove from the account annually to the RMD for that year. With the new rules, in a trust that is set up as described, the beneficiary would not be able to take any distributions in the first 9 years since there are no RMDs, and would then have to take the full value of the inherited IRA as a lump sum in the 10th year, since that is the only required distribution from the account. Obviously, this creates a massive tax burden for the beneficiary, but also eliminates the legacy that the original owner was trying to create.
There are four groups of beneficiaries, called Eligible Designated Beneficiaries” for whom this new rule does not apply. These are spousal beneficiaries, disabled and chronically ill beneficiaries, individuals who are not more than 10 years younger than the original owner, and certain minor children until they reach the age of majority.
With these new rules becoming effective as of January 1st, 2020, it’s extremely important to revisit your beneficiary designations, wills, and estate plan in general. Depending on your situation and the plans you have for your money after death, there may be better ways to structure things that will satisfy the new rules, while keeping your planned legacy intact.
3. For small business owners, which are defined as having 100 or fewer employees receiving $5000 or more of compensation, the SECURE Act creates a number of benefits, and one drawback, to sponsoring a 401(k).
- Prior to the SECURE Act passing, small business owners were entitled to a tax credit of up to $500 per year for up to three years of startup costs for sponsoring a retirement plan. For tax years beginning January 1st, 2020, the maximum credit will be increased to the greater of $500 or $250 per non-highly compensated employee eligible to participate in the plan up to $5000.
- Beginning in 2020, adopting auto-enrollment for your company’s retirement plan will qualify the business for an additional tax credit of $500 per year for up to 3 years. An important note here, is that you do not need to have established a new 401(k) plan for your company, you can simply add auto-enrollment to the existing plan and claim the credit for the subsequent years by keeping it in place.
- Starting in 2020, part time employees who have worked at least 500 hours for three consecutive years will be eligible to contribute to 401(k)s. Previously, an employer could exclude any employees who did not work at least 1000 hours in a single plan year from eligibility. However, those 3 years start for plan years beginning 2021—this means that the earliest a part time employee would be required to be eligible to participate in a 401(k) would be 2024.
- A number of barriers for establishing and maintaining Multiple Employer Plans (MEPs) have been reduced or eliminated. Basically, MEPs can now be put into place by employers in unrelated industries, and will not beholden to the “One Bad Apple” rule. This means that if one employer commits a disqualifying act, the others in the plan are not immediately disqualified as it has been until now. However, to take advantage of these new rules, the MEP must be administered by a Pooled Plan Provider, such as a Registered Investment Advisor (RIA).
Within the SECURE Act there are a number of other changes laid out, but we felt that the ones above were the most important to be aware of, and had the furthest reaching implications for the majority of people. As with all things related to your personal finances, the effect of the SECURE Act on your situation should be discussed with your financial advisor and accountant. All of us at Moore Wealth have remained abreast of the provisions of the SECURE Act since it was originally proposed, and have taken the time to educate ourselves on the final version of it. As a result, we are capable of discussing your current situation, and any changes that may need to be made to create the ideal scenario for you.