Congress has recently passed new legislation that probably affects your retirement plans. It’s called the Setting Every Community Up for Retirement Enhancement (SECURE) Act. It became effective January 1, 2020. The Act is meant to help more people better prepare for retirement. A summary of the Act follows.
Delayed RMDs. Until now, Required Minimum Distributions had to begin in the year you turned 70½. This legislation allows you to begin RMDs in the year you turn 72. This change recognizes that people are living longer. (Note that if you turned 70½ in 2019, you’re subject to the old rules. This means you must begin RMDs in 2019.)
Elimination of Stretch IRAs. For many of us, this is a negative aspect of the new law. Previously, non-spouses could withdraw from an inherited IRA over their own lifetime. The new Act requires beneficiaries to withdraw all of the IRA funds within a 10-year period. Withdrawals need not be equal, but the entire IRA amount must be withdrawn no later than year 10. Spouses, minors and a few others are exempt from this change.
Better Small Business 401(k) Access. The law makes several changes that make it easier for small businesses to offer 401(k) plans. The highlights include:
- Increased Tax Credit. The Act increases the small business tax credit from $500/year to $5,000/year over the first three years of the plan. This will offset many of the startup costs.
- Multiple Employer Plans. MEPs allow small businesses to pool their resources under a single plan which should lower per-company overhead.
Improved Part-Time Worker 401(k) Eligibility. Until now, part-time workers needed to log 1,000 or more hours per year (about 20 hours/week) to be eligible for 401(k) plans. This has been reduced to 500 hours/year (over 3 consecutive years).
Elimination of IRA Age Restrictions. Prior to the Act, people 70½ or older could not contribute to their IRA. This restriction has been eliminated for any earned income up to the normal contribution limits. (As a reminder, you’ve always been able to contribute earned income at any age to your Roth IRA.)
Penalty-Free Birth or Adoption Withdrawals. You can now withdraw up to $5,000 per person ($10,000 for couples) from your retirement account (IRA, 401(k), etc.) to help pay the expenses for a new birth or child adoption. This avoids the normal 10% penalty for early withdrawal.
Lifetime Income Disclosure Statements. If you have a 401(k) plan, you know that you receive periodic statements of the current value of your investments. Under the Act, plans must now tell you how long your investment would last if you should choose to purchase an annuity.
401(k) Annuities. The new law reduces an employer’s liability when offering an annuity plan in a 401(k) portfolio. This enables a company to add annuities to their mutual fund and other investment options. Annuities can now be rolled over when moving from one 401(k) plan to another. (In general, we aren’t big fans of annuities. Please see our 2014 article on this.)
There are more details on this legislation and the IRS has yet to issue any guidance on it, so additional information is advised. If you’d like to discuss how the SECURE Act affects you or review any other financial questions that you may have, please visit our website or give us a call at 970.419.8212 so that we can discuss your situation in a no-charge, no-obligation initial meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.