The final weeks of 2019 brought a relatively large piece of retirement legislation into law known as the “Setting Every Community Up for Retirement Enhancement” or SECURE Act. The act, which went into effect on January 1, 2020, includes multiple provisions that are sure to effect retirement savers. Here, we have outlined those that could prove most impactful depending on your specific retirement plan. As always, we encourage you to remember that each path to retirement and therefore each plan is unique, so it’s always best to speak with your financial advisor before acting on any new piece of information.
“Stretch IRA” eliminated for most non-spouse beneficiaries. The first notable change is the elimination of the “Stretch IRA” provision for most non-spouse beneficiaries of inherited retirement accounts. Previously, non-spouse beneficiaries were able to take distributions over their life expectancy, but under the new law, for those retirement account owners who pass away in 2020 and beyond, beneficiaries will have 10 years to empty the account. There is an exception for “eligible beneficiaries” which includes spouses, those who are disabled and chronically ill, individuals who are not more than 10 years younger than the decedent and minor children of the decedent. These “eligible beneficiaries” will be subject to the old rules. In the case of minor children, it is important to note the exception disappears once they reach the age of majority and the 10-Year Rule will begin at that time.
One implication of this rule is that beneficiaries may be required to withdrawal from an inherited retirement account faster than previously anticipated. This will reduce tax deferral and potentially spike their tax bracket due to higher withdrawals. We will be looking harder at strategies to mitigate these impacts to beneficiaries.
Minimum Distribution age moved from 70.5 to 72. The age for the onset of RMDs (required minimum distributions) used to be 70.5, but under the new rule the age is now 72.
The implications of this rule are positive for our clients. It will allow us to defer mandatory IRA distributions longer, which provides greater tax deferral and more time to execute strategies like Roth conversions.
IRA contributions allowed after age 70.5. There is no longer a restriction on making contributions to a traditional IRA after the age of 70.5, as long as the contributor has earned income. However, the SECURE act does not change the age at which an individual can make a QCD (qualified charitable distribution) from their IRA, which remains age 70.5. This new rule creates a 1-2 year window where IRA distributions may qualify as charitable contributions but not as RMDs. A provision was added that prevents those above age 70.5 from making tax deductible contributions to an IRA and later giving those contributions away via QCD.
The implications of this rule are also positive for our clients. The ability to contribute to an IRA above age 70.5 provides yet another tool for tax advantaged savings.
Penalty-free withdrawal for childbirth or adoption. The SECURE Act created a penalty-free IRA distribution for birth or adoption up to $5K for related expenses. This distribution can only be used once the qualifying event has occurred, so cannot be used to pay for initial adoption expenses prior to the adoption being finalized.
401(k) Plan Changes
Rules softened on MEPs (Multiple Employer Plans). The act changed regulations that reduce hurdles with operating Multiple Employer Plans. Larger plans typically have lower costs as they are able to spread out overhead among a larger participant and asset pool. Removing barriers to operating MEPs could result in lower costs and increased 401(k) access for workers.
Automatic escalation cap increases from 10 to 15%. Many 401(k) plans allow employees to select automatic, annual increases to their retirement contributions. Previously, this would increase annually until it reached a contribution rate totaling 10% of salary. This cap has been increased to 15% which could help workers save more for retirement.
Additional tax credits offered to employers. Small business (100 or fewer employees receiving $5,000 or more in compensation) are eligible for a $500 tax credit for up to three years for costs related to starting a corporate retirement plan. A separate $500 credit is available for employers who adopt an automatic enrollment arrangement. These provisions should incentivize businesses to open retirement plans and/or add automatic enrollment provisions which could lead to increased access as well as higher savings rates.
Rules changed which reduce risk for offering annuities from retirement plans. Many retirement plan providers and sponsors haven’t included lifetime income annuities in the plan due to liability and issues around being able to change the investment in the future. Regulations were passed that provide a path for reducing liability and creating a “distributable event” that would allow employees to distribute their plan annuity.
The SECURE Act repealed two healthcare related taxes. The ACA excise tax on “Cadillac” medical plans provided by employers has been repealed. As has the Medical device tax which was a 2.3% tax on all medical devices sold in the United States.