SECURE Act Impacts Employees, Retirees, and Small Business Owners!
Normally, I’d like to write you a fun, inspiring, and thoughtful New Year’s article that would just light you on fire with enthusiasm for the coming new year. Instead, we have a left-over Christmas present under the tree to unwrap, the SECURE Act of 2019. If you haven’t heard, the SECURE (Setting Every Community Up for Retirement Enhancement) Act was signed by the House last July and then by the Senate on Dec 20 for a Jan 1, 2020 start date. Whether this is a Christmas present you were hoping for, or not, largely depends on your specific circumstances. Unfortunately, there’s no “re-gifting” this package!
Firstly, this thing is huge, approximately 160+ pages with 28 sections to dive into. And it was embedded into the 768-page spending bill! So, we’ll be unwrapping this for weeks and months to come. For now, let’s just talk about a few of the major provisions that will impact the majority of your retirement planning circumstances. For the major ones, I’ll state some potential Planning considerations and questions for you to discuss with your Fiduciary Financial Planner.
If you would like to read the full text of the spending bill, you may access it here: H.R. 1865. Otherwise, read on for a summary of what I think are the key provisions…
SECURE Act Provisions Most Likely to Affect You
1. Required Minimum Distribution (RMD) rules (Section 114)
This is a small, yet mostly favorable, change. For those who are not yet 72, RMDs from retirement accounts such as 401(k)’s and IRA’s will now begin after age 72 rather than after age 70½. I say “mostly favorable,” because the longer your assets can stay in a growing tax-deferred account, generally the better. However, once you start taking your RMD’s at the new age of after 72, you may have more income which may mean a larger portion of your Social Security income is taxable and also a potentially higher Medicare premium.
There’s an extra bonus if you were born in the first half of the year. With the new age now at 72 and the 1st RMD payment due on April 1 of the following year, individuals born in the first half of the year get 2 years of extra growth compared to the previous law at 70 ½. That’s an extra year than if you were born in the 2nd half of the year!
Not affected by the new RMD age is the Qualified Charitable Distributions (QCDs), which are still allowable after age 70 ½. So, you may contribute up to $100,000 directly from your IRA to your favorite charity, thereby reducing your IRA balance if needed for Social Security tax planning and Medicare premium management purposes.
Some of your Retirement Planning considerations and questions that we can help you with:
How will the new RMD timing and schedule impact your Social Security taxation and Medicare premiums?
- Should you convert more to Roth’s now than you would have before?
- QCDs (Qualified Charitable Distributions) continue to have a start age of after 70½. Should those be a part of your strategy?
- Depending on your birthdate, will you have 1 or 2 years extra for your tax-deferred account to grow?
- Please note that Roth accounts do not require RMDs and that has not changed under the new SECURE Act. However, be aware that the rules for required distributions for beneficiaries has changed regarding inherited Roth, as described below in #2 below.
2. Modification of Required Distribution Rules for Designated Beneficiaries (Section 401)
Many of you will be reeling over this modification. If you are planning to leave a retirement plan to your descendants under the former “stretch” IRA rules, those rules have significantly changed. Generally, descendant beneficiaries (non-spousal) will no longer be able to take the proceeds of such accounts over the period of their lifetime (hence the term “stretch” IRA). Now, under the SECURE Act, the maximum deferral period will be 10 years. That may mean significant tax planning for those beneficiaries. There are a few exceptions where the new 10-year law does not apply:
- The new 10-year period does not apply to your spouse
- It does not apply to those that have already inherited an IRA
- Disabled beneficiaries as defined by IRS IRC Section 72(m)(7)
- Chronically ill beneficiaries as defined by IRS IRC Section 7702Bc(2)
- Beneficiaries that are less than 10 years younger than the decedent (original account owner)
- Certain minor children, up until the age of majority, then the 10-year law starts
It is important to note that governmental plans such as 403(b), 457, and the Thrift Savings Plan are not impacted until January 1, 2022. Also, annuities that have previously been irrevocably annuitized are exempt and continue to follow the terms of the annuitized contract.
Also, if you set up a trust as a beneficiary to one of your retirement accounts, the new 10-year rule may provide some challenges for general designated beneficiaries named in the trust. Even if you followed the See-Through Trust rules and set up either a Conduit Trust or a Discretionary Trust as a beneficiary to one of your accounts, you will need to see your Advisor and/or Estate Planning Attorney for if and how the SECURE Act may impact it. The new rules are unclear at this time for general designated beneficiaries named in such trusts. Although these trusts may be okay for disabled and chronically ill beneficiaries since they are exempted from the 10-year rule.
Some of your Retirement Planning considerations and questions that we can help you with:
- How will the new 10-year rule impact your legacy planning?
- Should you plan on Roth Conversions?
- What will be the impact on your beneficiaries’ taxes and their overall financial plan?
3. Repeal of Maximum Age for IRA Contributions (Section 107)
And some good news…beginning in 2020, individuals of any age, with “compensation,” will be allowed to contribute to a Traditional IRA. “Compensation” is generally earned income from either wages, self-employment, or a spouse who is working (for Spousal IRA contributions). Pre-SECURE Act rule was that you could not contribute to an IRA after age 70 ½, so this is a welcome change!
Always a caveat though…The SECURE Act also contains an anti-abuse rule that coordinates post-70 ½ Traditional IRA contributions with QCDs. Under the rule, any QCD will be reduced by the cumulative amount of total post-70 ½ IRA contributions that have not already been used to offset an earlier QCD. The purpose of this caveat is to prevent the abuse of individuals just ‘recycling’ their post-70 ½ IRA contributions into subsequent QCDs.
4. No 10% Penalty on Withdrawals for Childbirth or Adoption Expenses (Section 113)
Another welcome change! This new exception for account withdrawals allows up to $5,000 to be distributed from an IRA or qualified account as a “Qualified Birth or Adoption Distribution”. The withdrawal is not subject to a 10% penalty.
To meet the requirements of a Qualified Birth or Adoption Distribution, an individual must take a distribution from their retirement account at any point during the one-year period beginning on either the date of birth, or the date on which the adoption of an individual under the age of 18 is finalized.
5. Expansion of 529 Plans (Section 302)
This is an important provision that doesn’t really fit the “Secure Act” theme of changing retirement planning rules, but somehow it got in there. 529 funds can now be used for registered apprenticeships and up to $10,000 of qualified student loan repayments.
6. SECURE Act Provisions for Small Business Owners
Among small-business private-sector firms with fewer than 100 employees, roughly three-quarters of employees were not covered by an employer plan in 2017, according to the Center for Retirement Research at Boston College. Access to work-based retirement plans is the key way that Americans save for retirement. There is definitely a retirement crisis among people working at these small businesses!
Traditionally, for a small business owner to offer a retirement plan to employees has been very expensive. The 2019 SECURE Act attempts to make it easier and less expensive for small business owners to offer retirement plans. Here is a one-line description of the new key provisions that pertain to small business owners:
Section 101 – Multiple Employer Plan (MEP)
Unrelated companies can pool together to offer employees a retirement plan. The MEP provision is intended to set up automatic enrollment
Section 102 – New cap on automatic enrollments
The maximum 401(k) contribution for employers using an automatic enrollment safe harbor plan is increased from 10% to 15%
Section 103 – Simplification of safe harbor rules
Section 104 – Increase in the tax credit for setting up a retirement plan
Section 105 – A new small tax credit for setting up a new retirement plan with automatic withdrawals
Section 203 – Disclosure Regarding Lifetime Income
This provision requires employers to show plan participants what income their plan balance is likely to generate in retirement. Most individuals have unrealistic expectations, so this is a helpful change for employees although it is additional work for employers. Model disclosures are to be provided in the future. This may be an opportunity for the small business owner to offer retirement planning services to their employees as part of their benefits package.
Section 204 – Fiduciary Safe Harbor for Selection of Lifetime Income Provider
This provision is for employers to more easily allow annuity options. The insurance companies lobbied hard for this provision and they got it in. It remains to be seen if the fees associated with these new annuity options will be competitive with other direct rollover options (and then purchasing an annuity later). But having an annuity option within the 401(k) gives the employee/retiree a guarantee option that didn’t exist before.
See our Small Business Retirement Plan Consulting on how we help you and your employees.
Non SECURE Act Changes to be aware of
1. Change to the “kiddie tax” – back to pre-TCJA rule
“Kiddie Tax” is the tax on unearned income for a child under 18 (or 24 if they are a full-time student). The Tax Cut and Jobs Act (TCJA) gave a break that income could be taxed at the child’s tax rate. Well now that is repealed and the tax will once again be taxed at the parent’s marginal tax rate, as it was before the TCJA.
2. Changes to the life expectancy table for RMD calculations
Beginning in 2021 the IRS is changing its life expectancy table for the calculation of RMDs. It won’t be published here until it is official. But I have heard that the new RMD formula may be beneficial. In other words, the life expectancy factor may rise a bit so that the RMD is actually lower, meaning you can take less out of your account. That sounds good as it may help offset the larger account balances given the switch of taking RMDs after 72 instead of after 70 ½. Watch this space for more detail when it becomes available.
Next Steps
Whether you are an employee or a small business owner, the SECURE Act of 2019 has provisions that may affect you and your heirs. Contact Us today to set up a no-cost/no-obligation meeting to review your situation. We can jointly decide if our fiduciary services may be able to help you put a Retirement Plan in place for you personally or how these new changes may affect your employees.
About Kastler Financial Planning
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