On December 20, 2019, the Setting Every Community Up for Retirement Enhancement Act, or SECURE Act, was signed into law. This act implements some major changes to retirement legislation and may have a significant impact on your retirement planning. The SECURE Act went into effect at the beginning of the year, so it’s important that you learn as much as you can about its provisions and how they impact you. We’ve put together some of the highlights of the SECURE Act here, but if you have any questions about how these changes will impact your retirement plan, contact our financial planners for assistance.
Required Minimum Distributions Pushed Back
Previously, individuals were required to take minimum yearly distributions from their retirement accounts beginning at the age of 70 ½. The SECURE Act changes this to age 72. Of course, you can still take distributions prior to this age of necessary; however, you will no longer be required to take required minimum distributions (RMDs) until you reach the age of 72.
Note that this only applies to individuals who will turn 70 ½ in 2020 or later (those born on or later than July 1, 1949). If you were born before this date, the previous age requirement still applies. This change applies to traditional IRAs as well as 401(k)s, 403(b)s, 457s, and other employer tax-deferred retirement accounts.
Continue Contributing to Your Traditional IRA
Under previous laws, you could no longer contribute to your IRA once you began taking RMDs at the age of 70 ½. Now, however, you can continue to contribute to your traditional IRA indefinitely, so long as you have earned income. This is excellent news for senior citizens who continue working, as has become more common in today’s society. With Americans retiring later and later in their lives with each passing year, this enables elderly income-earners to continue contributing to a retirement account.
No More Stretching Inherited IRAs
Certain provisions surrounding inherited IRAs enabled the beneficiaries to extend required RMDs over their own lifetime, potentially allowing those funds to continue growing for decades, free of tax. Those provisions have been eliminated for IRAs, 401(k)s, and other defined contribution plans. Now, distributions to a non-spouse individual beneficiary must be made within 10 years of inheritance.
There are exceptions for spouses, disabled individuals, as well as a few other types of beneficiaries of such plans. Minor children who inherit a retirement plan also have a special exception to the new rule, but only until they come of age.
If you’ve already inherited a stretch IRA, don’t worry. These changes only apply to accounts wherein the account owner passes away in 2020 or later.
Penalty-Free Withdrawals for Adoption or Birth
The SECURE Act also implements penalty-free withdrawals from retirement plans in order to pay for expenses related to childbirth or adoption. Parents can withdraw up to $5,000 each to help cover these expenses. So, if you and your spouse each have separate retirement accounts in your own names, as a couple you can withdraw up to $10,000 to pay for the birth or adoption of your child.
Retirement Eligibility for Part-Time Workers
Part-time employees were, more often than not, unable to participate in employers’ retirement plans. Under the SECURE Act, employers maintaining a 401(k) plan are now required to offer this benefit to any employee who worked more than 1,000 hours in a year, or over 500 hours over 3 consecutive years. This opens up the opportunity to contribute towards retirement for many long-term workers who don’t work a full-time employment schedule.
Retirement Plan Tax Credit for Small Businesses
Many small-business owners have struggled in the past to offer retirement plan benefits to their employees; this often made it difficult for them to compete against larger businesses to acquire top talent. Now, the government will offer a tax credit for small employers with fewer than 100 employees who offer this benefit.
The credit will provide $250 per non-highly compensated employee who is eligible to participate in the retirement plan, with a minimum credit of $500 and a cap of $5,000. If your plan include automatic enrollment, you’ll can an additional credit of up to $500. This applies to SEP, SIMPLE, 401(k), and profit-sharing plans.
The SECURE Act implements many changes that are designed to make it easier for Americans to plan for and contribute to their retirement. If you have questions about how these changes impact you or your business, contact Kohl & Company CPAs today to speak to a financial planner.