SECURE ACT Makes Changes to Retirement Planning at the End of 2019
February 19, 2020
The Setting Every Community Up for Retirement Enhancement (SECURE) Act (the "Act") was passed at the end of 2019 and makes changes to many aspects of retirement plans.
Increased RMD Minimum Age
The Act increased the Required Minimum Distribution ("RMD") Age to age 72, up from the 70 ½ in prior years. The government stated that Americans live longer and this change is to address the current life expectancies. RMDs are amounts that U.S. tax law requires a taxpayer to withdraw annually from traditional IRAs and employer sponsored retirement plans. The RMD is based upon the taxpayer’s age at the end of the year and life expectancy per government mortality tables. The total of all traditional IRAs plus employer-sponsored defined contribution retirement plans at the end of the previous year is divided by the mortality number associated with your year-end age – the result is your RMD for the year.
The Act also eliminates the maximum age for traditional IRA contributions, which previously stopped at age 70 ½. As Americans are living longer and continue to work into their 70s, there is no reason to require them to stop saving for retirement.
HOWEVER: If you turned 70 ½ in 2019, you needed to withdraw your first RMD by the end of 2019 or at the latest, April 1, 2020. If you were 70 ½ during 2019 and take your first RMD in 2020 by April 1, you will need to take your second distribution by December 31, 2020 as the prior law had prescribed. Failure to do so will result in a 50% penalty of the RMD.
No More Stretch IRAs
Other than IRAs inherited from a husband or a wife, ALL other IRA beneficiaries must withdraw all assets of an inherited account within 10 years. For taxpayers dying after December 31, 2019, their non-spousal IRAs can no longer be drawn out over the beneficiary's lifespan. There are no minimum distributions within those 10 years but the entire balance must be distributed from the account by the end of the 10t h year. This change can cause tax planning problems for beneficiaries in their peak earning years, taxing distributions at potentially higher tax rates.
Annuities within 401(k) Plans
The Act allows more employers to offer annuities as investment options inside of 401(k) plans. The burden previously on employers to ensure the annuity products were appropriate for employees’ portfolios now falls to the insurance companies that sell the annuities, to offer proper investment choices. Annuities are complex investment products and should be used only with the assistance of qualified financial advisors. Used appropriately, annuities can provide guaranteed income over long periods of time for the longer-living retiree of today.
Small Business Multi-Employer Plans
The Act broadens access to multi-employer plans for small businesses. Under previous rules, the entire plan became tainted if one of the employers did not follow the rules; the Act removes this "bad apple" rule. It no longer requires employers to share a common characteristic, like being in the same industry. The ability to aggregate employers can generate economies of scale, such as lower pricing and access to more features.
Long-Term Part-Time Employees
The Act lowers the entry thresholds for long-term part-time employees down to one full year with 1,000 hours worked, or three consecutive years of at least 500 hours worked.
The SECURE Act offers a tax credit for employers that automatically enroll workers into their retirement plans. Auto-enrollment is a simple but effective measure to get people saving more for their future.
Under the SECURE Act, small employers will get a tax credit to offset the costs of starting a 401(k) plan or SIMPLE IRA plan with auto-enrollment, on top of the start-up credit they already receive.
As with all government legislation, there are details to be addressed in order to take advantage of the virtues of the Act. Reimer, McGuinness & Associates can help you plan and make the most of changes the new Act offers.
About the Author:
Tom is one of the founding partners of Reimer, McGuinness & Associates, P.C. He earned his accounting degree at the University of Houston and has been a licensed CPA since 1983 and has been working in public accounting for 37 years. While Tom works with many different industry groups and types of businesses, throughout much of his career he has worked in the area of physician-side healthcare, working with physicians and physician groups in many ways. From helping with tax and accounting issues to providing assistance in the management of their offices, and reviewing reimbursement, providing valuations of medical practices, and many other consultative areas, Tom is a valuable asset for his clients.