Just before 2019 ended, Congress passed the SECURE Act (“Setting Every Community Up for Retirement Enhancement”). It had been languishing for months and was suddenly wrapped up in the budget legislation and passed accordingly — a surprise to most of us. It’s designed to make retirement plans more available to American workers, but there are also quite a few revenue-raisers in the bill as well that will throw a wrench into existing estate planning.
As a result: for employers, it’s a good time to revisit the retirement options you’re offering your staff; and for taxpayers, it’s a good time to revisit your retirement and estate planning.
Forbes provided a good summary as to the highlights of the Act.
Several rules related to tax-advantaged retirement accounts were altered. Here’s what will change:
- The age at which retirement plan participants need to take required minimum distributions (RMDs) has changed to age 72 (changed from 70 ½). This only applies to those who hadn’t reached 70 ½ by the end of 2019.
- Limited to $10,000 annually, the IRS has approved the use of 529 accounts for qualified student loan repayments.
- For child adoption and family planning, individuals can withdraw up to $5,000 from 401(k) accounts penalty-free to assist in the cost.
- Employers with an automatic enrollment into a 401(k) or SIMPLE IRA plan will receive a maximum tax credit of $500 per year.
- Part-time employees who work at least 1,000 hours throughout a year or have 500 hours of service within three consecutive years can enroll in the employer-sponsored retirement plan.
- An option for plan sponsors to use annuities in workplace plans to reduce liability if the insurer cannot meet its financial obligations.
If you’re an employer, definitely take a look at the credit available toward starting up a company retirement plan, and if you’re an employee, let your boss know about this credit, and that many part-time employees are now eligible to participate, but without tipping the scales away from full-time, highly-compensated employees. It’s a win-win.
As an employee, remember that there is still a credit for lower-income taxpayers for saving toward retirement, called the Retirement Savers Credit. In my work as a tax preparer I see this as an underused but very valuable perk toward getting folks started on saving for the future. Nerd Wallet wrote up a nice summary of the credit.
The SECURE Act also impacts so-called “Stretch” and Roth IRAs. It caps the distribution period for Stretch IRAs (a type of inherited Traditional IRA plan) to ten years, inflating the taxable income for recipients who otherwise would have taken smaller distributions over a longer period of time. This makes Roth IRAs more attractive — because when a Roth is inherited, it doesn’t have the same effect of bumping beneficiaries into a higher tax bracket (since with a Roth, the tax was paid before the IRA was funded).
Henry Montag of Bloomberg Tax offers a clear explanation of this situation, as well as some great planning tips, here — INSIGHT: Planning Considerations Regarding the SECURE Act.
Some options for estate planning now that “Stretch” IRAs aren’t as attractive include:
- Taxable investment accounts
- Life insurance
- Leave the IRA to a charity
- Roth conversions
Regardless of your tax bracket or plans for retirement, the SECURE Act will likely affect you in some way, shape, or form… so be proactive and work with your CPA or lawyer to make sure you’re making the most of it.