We have been tracking the “Setting Every Community Up for Retirement Enhancement” Act, known as the SECURE Act since it was approved by the House in May. Congress added it to the year-end spending bill that was approved by the House on December 17th and by the Senate on December 19th. President Trump signed it on December 20th.
While it is called the SECURE Act, it is really a mixed bag of new regulations – some good and some bad. The main two aims of the legislation seem to be to encourage more retirement savings and to increase tax revenue the government derives from IRA distributions. Whether you come out ahead is based on your individual circumstances.
The key provisions of the SECURE Act are:
Change to Required Minimum Distribution (RMD) Age
The age at which you must begin taking mandatory distributions from IRAs has been increased to age 72 from 70 ½. This change only applies to people who turn 70 ½ after December 31, 2019. Those who turned 70 ½ in 2019 still need to take RMDs as they would have prior to the new law.
For people who work past age 70 ½ this change can be helpful as they can wait a year and a half before taking a taxable distribution. For those wanting to do Roth Conversions spread out over several years, the change can also be helpful.
IRA Contributions after age 70 ½ are Now Allowed
Prior to the bill’s passage, an individual had to stop making contributions to an IRA at age 70 ½. Under the new law, any person who has earned income can continue to contribute up to any age.
For those people working well past what is considered ‘normal’ retirement age this can give them a few more years savings. It can also help those still working to offset their RMDs once they reach age 72. Another thing to consider is that there is no RMD requirement for your 401(k) at your current employer; you may want to consider rolling IRA money into your current plan if you would like to avoid RMDs while still working.
Inherited IRA Accounts
If you inherit an IRA from a non-spouse, you must take the money completely out of the inherited IRA within 10 years. Previously, you could limit distributions to RMDs based on your life expectancy. This change is potentially the largest revenue generator due to most people inheriting their parents’ IRAs when they are in their peak earning years; IRA distributions are added to ordinary income to determine your total tax liability.
There are exceptions to the new rules for minor children, disabled individuals and people less than 10 years younger than the decedent. If you already have an inherited IRA, you are also exempt from the new rules; they only apply to IRA’s inherited in 2020 and beyond.
One helpful provision in the 10-year distribution rule is that you must fully distribute the IRA ‘within 10 years.’ For those who inherit an IRA while still working, they may want to delay taking the IRA distributions until retired. For instance, if an individual who plans to retire at 66 inherits an IRA from a parent at age 62. They could delay distributions until retirement at age 66. The distributions, which now need to be taken out within 6 years, could allow this person to delay their Social Security filing in order to increase their benefit.
Part-time Workers can now Participate in 401(k) Plans
Employers, prior to passage, could choose whether to let part-time employees (less than 1,000 hours per year) participate in 401(k)’s. Now any part-time employee with at least 500 hours per year for three consecutive years must be given the opportunity to participate. The employer does not have to provide matching contributions for these employees and these employees are not included in top-heavy testing of the plan.
This change can help people who choose to work part-time or those in a circumstance where they work two or more part-time jobs. The only cost to the employer is the administration expense of including these employees in the plan; this could potentially increase the expenses of the plan as there would potentially be more small accounts to have to track.
Annuities can more Easily be Offered in 401(k) Plans
While plans are not required to offer annuities, the new law makes it easier to do so. Annuities offer provisions, such as lifetime income, that are not available from mutual funds or other 401(k) investments. These provisions may be attractive for employees nearing retirement in order to provide a more consistent income in retirement.
The SECURE Act also allows small businesses to join with other small businesses to offer “multiple employers plans”. This can reduce costs to small businesses to make offering retirement plans more affordable.
529 College Savings Plans
Up to $10,000 can be withdrawn to repay student loans. I see this provision being used rarely; if you had $10,000 in a 529 plan that you could access why would you borrow $10,000, other than (maybe) a tax deduction for the contribution.
If any of these provisions apply to you, you should make an appointment with your financial advisor for a retirement plan review. You may also want to download the Presidential 2020 Key Data Reference Guide. This guide outlines the new year’s tax brackets, contribution limits, and standard deduction amounts as well as other information regarding taxes and saving for retirement.