SECURE Act: Sweeping Changes Coming to Retirement Planning
Statistics show that most Americans have little to no savings for retirement, even at a time when fewer and fewer employers offer pension retirement plans for their employees. On December 20, 2019, the SECURE Act, an acronym for Setting Every Community Up for Retirement Enhancement Act, became law as part of larger spending legislation titled, Further Continued Appropriations Act, 2020. The SECURE Act liberalizes rules for retirement and education savings and alters certain guidelines that specify when distributions from such plans can occur. The SECURE Act also streamlines reporting and compliance for employers who sponsor plans for their employees and provides incentives in the form of tax credits to those considering sponsorship of a plan. The Act further includes offsetting provisions designed to raise revenue, the largest of which will impact inherited IRAs and defined contribution plan accounts.
Here we highlight some important features of the new law that impact individuals, beginning with the bad news first.
1. Elimination of Non-Spouse Stretch-IRA Provisions
Under prior law, a non-spouse beneficiary inheriting an IRA or qualified plan could withdraw the account assets over the course of the beneficiary's lifetime. If the beneficiary was a child or grandchild of the contributor, his or her life expectancy could be 50 years or more, which could amount to decades of income tax deferral and tax-free growth on the assets. The SECURE Act does away with this potential long-term deferral opportunity. Beginning in 2020, and unless an exception applies, a non-spouse inherited IRA must be distributed within 10 years of the IRA contributor's death.
Accounts inherited from a decedent who died prior to January 1, 2020 may still distribute over the lifetime of the recipient.
2. 401(k) Participation by Certain Part-Time Workers Permitted
The new law provides that part-time workers who are at least 21 years old, have worked for a company for 3 or more years, and work at least 500 hours a year, are eligible to participate in that employer's 401(k) plan. Under previous law, employers could exclude employees who worked less than 1,000 hours per year.
While part-time employees will now be eligible to participate and contribute to the employer's 401(k) plan and defer a portion of their salaries to such plans, employers are not required to match contributions or otherwise provide for part-time employees.
3. Increased Age for IRA and Employer-Sponsored Qualified Plans Required Minimum Distributions
Prior to the SECURE Act, participants in qualified retirement plans and IRAs were required to take required minimum distributions from those accounts beginning at age 70½. Those who did not need to take the fully-taxable distributions at that time due to sufficient cash flow from other sources often lament this rule. Under the SECURE Act, a person attaining age 70½ after December 31, 2019 can now elect to defer distributions from those accounts until April following their 72nd birthday or possibly until they retire for those working later in life. Company owners (5% or greater ownership), must, however, begin taking distributions from employer plans at age 72, even if they continue working.
4. No Age Limit for Contributions to Traditional IRAs
Beginning January 1, 2020, a person of any age may contribute to a traditional IRA. Prior law prohibited contributions after age 70½.
5. Penalty-Free Withdrawals from IRAs and Qualified Plans for Birth or Adoption
Within a year from the date that a child is born or adopted, each parent can withdraw up to $5,000 from a qualified retirement plan or IRA without incurring a 10% early withdrawal penalty. Under previous law, withdrawals prior to 59 ½ incurred a 10% penalty unless an exception applied, which did not include birth or adoption. An adopted child, under the new law, must be under age 18 at the time of adoption or suffer from a physical or mental disability.
6. Up to $10,000 of 529 Funds Applied Toward Student Loan Debt
The definition of tax-free distribution is expanded to include distributions up to $10,000 to satisfy student loan debt and certain apprenticeship program costs.
7. Expanded Definition of Compensation for Purposes of Allowing Contributions to Retirement Plans
The new law reclassifies certain payments as compensation to allow recipients to contribute to retirement plans. These include fellowship and stipends for graduate students and qualified foster care payments, which were previously excluded from such determination of income.
The SECURE Act makes major changes to existing laws and will impact millions of Americans beginning in 2020. If you have questions about how these changes may affect your retirement plans, feel free to contact your UnionBanc Investment Services Financial Professional.
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