A recently passed spending bill could have a big impact on your retirement plans. On December 20th, 2019 the Senate passed the year-end spending bill that included the SECURE Act, which is effective as of January 1st, 2020.
What Is the SECURE Act?
The SECURE Act stands for Setting Every Community Up for Retirement Enhancement. This Act changes prior rules for a variety of things, including early IRA withdrawal penalties for the birth or adoption of a new child, but we will focus on its straightforward retirement impacts.
How Does the SECURE Act Change the Prior Laws?
Elimination of the Stretch IRA
One of the biggest changes implemented by the SECURE Act is the elimination of the “stretch” IRA. Before this Act, beneficiaries of an IRA could take distributions over their entire lifetime, thus spreading out income taxes on those distributions as well. Now, the inherited accounts must be drained entirely in the course of ten years.
This change is effective for all deaths after December 31st, 2019. Any beneficiary of an IRA whose original owner passed away before this date will not be affected by the new legislation. However, once that beneficiary dies, his or her heirs will be subject to the ten-year rule.
There are some exemptions to this ten-year rule. If the beneficiary is a spouse, a minor child, someone chronically ill and disabled, or less than ten years younger than the account owner, then they are not required to fully drain the account holder’s IRA in ten years. Only minor children are exempt; grandchildren are not exempt, and those minor children will no longer be exempt once they reach the age of majority.
Eliminates Age Limit Restrictions for Traditional IRA Contributions
Before SECURE, traditional IRA account holders could only contribute to their accounts up until age 70.5. Now, there are no age restrictions on contributions, which could be useful for many people who continue to work past age 70.5.
Changes the Age for Required Minimum Distributions (RMDs)
RMDs are the minimum amount that the IRA account holder must withdraw each year from their account. Before SECURE, individuals had to begin taking RMDs at age 70.5; now, the age is 72.
This new age limit only applies to those who have not yet reached age 70.5 or who were younger than 70.5 in 2019. Those who were born before June 30th, 1949 will continue taking RMDs according to the old law.
Eases Restrictions for Employers
For small employers who wish to provide retirement plans to their employees, the SECURE Act just made this a little easier. Many small businesses are discouraged from offering retirement plans because of the headache of compliance and administration.
Some small businesses have gotten around this by forming a multiple employer plan (MEP). MEPs are created when multiple businesses that have a common link unite and share a plan administrator.
Under the new Act, MEPs are no longer restricted to being formed of businesses with that common connection (like being in the same industry). Starting in 2020, small businesses without a common link can now form MEPs, which will likely lead to greater retirement plan access for small business employees.
Expands Part-Time Worker Plan Eligibility
The SECURE Act may also be a boon to part-time workers. Part-time employees who have worked in excess of 500 hours for the past three years at one company are now entitled to participate in their employer’s 401(k) plan. If a part-time worker has not been with the company for three consecutive years working 500 hours each year, they may still be entitled to 401(k) participation. So long as they have worked 1,000 hours in the past one year, they are still entitled to plan access.
Who Does This Affect?
Although some parts of the SECURE Act may affect individuals of all financial statuses, the elimination of the stretch IRA will have the greatest significance for financially comfortable non-exempt beneficiaries who had planned to take distributions over the course of their IRS-defined life expectancy. The ten-year rule is of much greater concern to beneficiaries who stand to inherit large sums that would change their income tax brackets than those who would remain in similar financial standing.
There is much more to be said about the SECURE Act and how it will affect retirees and beneficiaries, which is why we will be posting another blog on the subject next week. Be sure to allow notifications from Morris Financial Concepts to stay informed on when we post new blogs to our News section.
If you would like more information on this topic sooner than next week, please reach out to the best financial advisors in Charleston, SC.
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