3 Ways the SECURE Act May Affect Your Retirement Planning

Most Americans would agree that the U.S. retirement system is far from perfect, and they’re correct. One in three Americans have absolutely no retirement savings. More and more people are going into retirement with little to no financial security. We are on the brink of a retirement crisis. Despite our current retirement calamity, we still haven’t been able to agree on a strategic plan to offset this alarming trend. But that might be changing — at least we hope so.

As an attempt to resolve this ongoing issue, a new tax law, The SECURE Act, was signed into law on December 20th, 2019. The SECURE Act is an acronym for Setting Every Community Up for Retirement Enhancement, and on paper, it aims to do just that. 

The new tax law has been a hot topic of discussion because of its widespread impact on individuals and business owners across America. The intention of the act is to provide American citizens with more options for saving and investing for their Individual Retirement Account (IRA) and employer-sponsored 401(k) plans. This law aims to do this by increasing access to tax-advantaged accounts and preventing older Americans from outliving their assets. 

Here are three of the major provisions:

1. Increasing the required minimum distribution (RMD) for retirement plans;  
2. Expanding retirement plans and their accessibility; and
3. Eliminating the stretch IRA.

Increasing the Required Minimum Distribution (RMD) for Retirement Plans 

One of the biggest provisions the law enacted was pushing back the age at which retirement plan participants must begin taking RMDs from 70 ½ years old to 72 years old. 

Prior to the SECURE Act, if you had money in an IRA or 401(k) plan and were retired, you were legally required to begin making withdrawals at the age of 70 ½. However, this new tax law now pushes that date back. If you were below the age of 70 ½ at the end of 2019, you are not required to start making withdrawals until the age of 72. A year and half doesn't sound like a lot, but it actually can make a huge difference for these account holders nearing retirement.

Another major benefit of pushing back the RMD start date: You get a longer eligibility window to contribute to your retirement plans. You are given extra time to grow your IRAs and 401(k)s without being drained by distributions and taxes, which can lead to quite a bit of financial growth.

This is also beneficial for Roth IRAs. A Roth IRA is similar to a standard IRA, but it allows you to make withdrawals tax-free (if you meet specific requirements) and there are no RMDs during the span of your life. The Roth conversion aims to convert taxable money in an IRA into a Roth IRA, with current lower tax rates than you’d anticipate paying in the future. With the additional time, individuals are now given more Roth IRA planning opportunities. 

More Accessible Retirement Plans

Another SECURE Act provision makes retirement plans more inclusive. The law mandates extending retirement plan access to part-time employees. Up until the SECURE Act, if you worked less than 1,000 hours per year, you were typically ineligible and excluded from participating in your company's 401(k) plan, which meant saving for your future was hard.

With this provision, part-timers are eligible to save through employer-sponsored retirement plans by decreasing the threshold for eligibility. Now, you are able to participate in the plan if you work for either 1 full year with 1,000 hours of work time or 3 consecutive years with at least 500 hours.

The SECURE Act also makes it easier and more affordable for small business owners to set up 401(k)  plans for their employees. The new rule allows more small businesses to band together, pool their resources and adopt Multiple Employer Plans (MEPs). MEPs allow you to share the expenses and administrative duties with other small business owners. 

The law enables unrelated employers to participate in an MEP, which allows you to join together and offer your employees better contribution retirement plans. This new law also abolishes the IRA’s former rule, which stated that all business owners participating in an MEP, are susceptible to face harmful tax consequences if one employer fails to meet the tax qualification requirements for the MEP, which releases the burden placed on business owners.

As of right now, roughly 55% of the U.S. adult population participates in a workplace retirement plan. Open MEPs provide a solution to this crisis by delivering inexpensive, high-quality retirement plans for millions of employees.

Another way retirement is changing for small business owners, is through tax incentives. Under the SECURE Act, small employers are offered tax incentives if they provide a secure retirement plan option for employees. So, if you are a small business owner, you can receive additional credit to balance out the costs of starting a 401(k) plan or savings incentive match plan for employees (SIMPLE) IRA with auto-enrollment. You can receive up to $5,000 in tax credit for starting a retirement plan.

Here are the guidelines and eligibility requirements to receive credit:

• The new law provides a start-up retirement plan credit for smaller employers of $250 per non-highly compensated employees eligible to participate in an employer-sponsored retirement plan at work. This has a minimum credit of $500 and maximum credit of $5,000.
• This credit applies to small business owners with up to 100 employees over a 3 year period beginning after December 31, 2019 and applies to simplified employee pension (SEP) IRA, SIMPLE IRA, 401(k), and profit sharing types of plans.
• If the retirement plan includes automatic enrollment, an extra credit of up to $500 is available to business owners.

In other words, the SECURE Act will make it easier for small business owners to set up retirement plans that are affordable, high-quality and effortless to administer. It enables you as a small business owner, to provide retirement planning resources for your employees without hurting your business.

Removal of the Stretch IRA and the Impact on Beneficiary Designations and Trusts

Another important change in the new bill is the removal of a provision called the stretch IRA. In the past, if you inherited an IRA or 401(k), the stretch IRA allowed non-spouses inheriting to “stretch” out distributions and tax payments out over their entire lifetime. When and how much beneficiaries withdrew, was entirely up to their discretion (aside from the RMDs). 

In fact, many heirs have used "stretch" IRAs and 401(k)s as a major source of income. Often times, stretch IRA accounts were passed down from generation to generation, allowing each holder to take advantage of tax-deferred and tax-free growth of the assets within it. 

Now, for IRAs inherited from original owners who have passed away on or after January 1, 2020, the beneficiary is required to do a full payout within 10 years following the death of the original account owner. This completely destroyed the strategy to protect inherited income from creditors. This new mandate is estimated to raise $15.7 billion in additional tax revenue, which will be used to fund the other changes implemented by the SECURE Act.

For beneficiaries who are surviving spouses, minor children, and those not more than 10 years younger than the deceased, this rule does not apply. They are exempt from this new 10-year distribution rule. However, for those who do not fall into one of the above categories, the new law may impact beneficiary designations. With the new SECURE Act in place, you should carefully review the beneficiary designations of your retirement accounts to make sure they align with the new beneficiary rules.

This may also impact trusts. The law can alter a trust so it is critical to review the language of the trust. If you are the beneficiary of an IRA or employer-sponsored retirement plan, you should immediately review the trust’s verbiage to ensure that it still aligns with the original account holders intended desires.

Additional Retirement Plan Changes

• You can now make IRA contributions past the age of 70 ½. This means traditional IRA owners are able to keep making contributions indefinitely — as long as they work.
• The new law guarantees “lifetime income investment” from retirement plans. This means that this investment can be distributed from your workplace retirement plan. The retirement income options are transportable. In other words, if you left your job, you could easily roll over this lifetime income investment to another 401(k) or IRA at your new job, without any issues.
• The SECURE Act allows small business owners to offer annuities as investment options within 401(k) plans for employees. Previously, that was not allowed. The obligation to offer proper investment choices no longer falls on the shoulders of the employer, it is now placed on insurance companies, which sell annuities. 
• As a new parent, you are able to withdraw up to $5,000 (each) penalty-free from your retirement plan to help cover expenses for the birth or adoption of a child. The 10% early withdrawal penalty is not applicable to these withdrawals, and you can repay them as a rollover contribution to an applicable eligible defined contribution plan or IRA.
• Parents can withdraw up to $10,000 from 529 funds to repay student loans over the course of the student’s lifetime.

Start Planning for Your Future

Many Americans feel as though their ability to save for a retirement fund is threatened, and for good reason. Out of the Americans who have saved for retirement, half of them reported to have $10,000 or less in their retirement account. This amount is not enough to support themselves throughout their retirement life — not even close. 

Unlike in the past, the majority of Americans no longer enjoy the comfort of having a secure retirement. Rather than the relaxing, work-free retirement life we envision, we look to retirement as a stressful period unsure of how we will get by and for many, that is a reality. Almost 60% of Americans report losing sleep thinking about retirement.

Almost half of all Americans have no retirement plan savings whatsoever. No matter what way you frame it, this is problematic. Americans are way behind on retirement savings. We need to be proactively saving and start planning for our future, but the programs currently in place may not suffice. 

In theory, the SECURE Act sounds great for retirement security and it very well might be, but we haven’t had it in place long enough to really know the effects — only time will tell.