You may be aware that on December 20, President Trump signed into law the SECURE Act (short for Setting Every Community Up for Retirement Enhancement Act). It is the broadest piece of retirement legislation passed in the last 13 years. The intent of this law is to expand opportunities for individuals to increase their retirement savings, but it includes some other tax changes as well and will be impactful to many.
The most immediate impact of the bill will be felt by individuals nearing or in retirement. Small businesses will also be a heavily affected group. If you haven’t made yourself familiar with the SECURE Act yet, keep reading. You may be surprised how much these legislative changes could affect your retirement and further financial planning. Here are some of the key aspects to take note of...
- Required Minimum Distribution (RMD) Relief for Retirement Plans: If you haven’t hit 70½ by the end of 2019, you will not have to start taking withdrawals from your IRA or employer-sponsored retirement plan until age 72. This is good news as pushing back the RMD start date gives you almost two additional years to allow your IRAs and 401(k)s to grow without being depleted by distributions and taxes.
- Additional Roth IRA Opportunities: Because RMDs will no longer start at age 70½ but age 72 instead, you will have more time for Roth IRA conversions as well. With a Roth IRA, unlike a traditional IRA, withdrawals are tax-free as long as you meet certain requirements and there are no RMDs during your lifetime. The general goal of a Roth conversion is to convert taxable money in an IRA into a Roth IRA at lower tax rates today than you expect to pay in the future. While you can do Roth conversions after you start RMDs, the process is a lot harder.
- No More Age Restriction on Traditional IRA Contributions: Beginning in the 2020 tax year, people will now be able to make contributions to their IRAs after reaching age 70½. This is great news for those who plan on working into their 70s as they will still be able to put money into a deductible IRA, which can lead to valuable tax deductions and more savings for the future.
- Easier and Less Expensive for Small Business Owners to Set Up Retirement Plans for Employees: A new rule that’s part of the SECURE Act will let more small businesses band together to offer Multiple Employer Plans (MEPs). It could be a few years before employees see this occur as the law’s MEPs provisions don’t take effect until 2021. Additionally, the U.S. Department of Labor will need to clarify the rules before many small business employers will feel comfortable providing retirement accounts.
- Guaranteed Lifetime Income from Retirement Plans: The SECURE Act will also encourage employers with retirement savings plans to let employees convert their savings into guaranteed lifetime income through annuities. However, this is another aspect that will probably take years to actually enact.
- A Reason to Review Beneficiary Designations: The SECURE Act also removed “stretch” provisions for beneficiaries of IRAs and defined contribution plans, like 401(k)s. In the past, if a traditional IRA was left to a beneficiary, that person could, in most cases, stretch out the RMDs over his or her own life expectancy, essentially “stretching” out the tax benefits of the retirement account. Now, most IRA beneficiaries will have to distribute their entire inherited retirement account within 10 years of the year of death of the owner. Surviving spouses, minor children and those not more than 10 years younger than the deceased, however, are generally exempt from this new SECURE Act 10-year distribution rule. The takeaway is that it’s more important than ever to review the beneficiary designations of your retirement accounts to make sure they align with the new beneficiary rules.
- A Reason to Review Trusts: In the past, many people used trusts as beneficiaries of IRAs and 401(k)s, with a “pass-through” feature that let the beneficiary stretch out the tax benefits of the inherited account. The benefit of the trust was, in part, to help manage the inherited retirement account and to provide protections from creditors. However, many of these trusts provided the beneficiary or heir with access to “only the RMD due each year.” Now, the SECURE Act states that all money must be taken out by the end of year 10 after the death of the owner. This means that anyone with a trust as the beneficiary of an IRA or employer-sponsored retirement plan, such as a 401(k), should immediately review the trust’s language to see if it still aligns with his or her intended goals.
Overall, the SECURE Act also means a lot of changes and although many may be positive for a lot of people, they will also require proactive financial planning in order to adjust seamlessly. So, it is important to speak with your trusted, qualified professionals about how these changes relate to your personal financial situation. Please feel free to give us a call if you need any advice or if you have any questions related to the SECURE Act.