Category: Retirement News

What You Need to Know About the SECURE Act

Siân Killingsworth / 17 Jan 2020 / Retirement News, Ubiquity Insights

The SECURE Act, which stands for the Setting Every Community Up for Retirement Enhancement Act, is the biggest piece of retirement legislation in over a decade. Provisions from the bill, which originally passed through the House in May 2019, were wrapped into a larger government spending package and signed into law on December 20, 2019.

This piece of important retirement legislation includes policy changes to retirement plans, annuities, pension plans, and 529 college savings accounts.

Key changes from The SECURE Act include:

• Increasing tax credits for small business owners to set up and run retirement plans
• Introducing incentives for new plans with auto-enrollment
• Raising the required minimum distribution (RMD) age for retirement accounts to 72 (up from 70½)
• Allowing long-term, part-time workers to participate in 401(k) plans
• Expanding options for multiple, unrelated businesses to partner under a single retirement plan (MEPs)
• Permitting parents to withdraw up to $5,000 from retirement accounts penalty-free within a year of birth or adoption
• Allowing withdrawals from 529 plans to repay student loans

Most SECURE Act provisions went into effect on January 1, 2020. Let’s dive deeper into some of the biggest changes ahead for retirement savers and small business owners:

Small business owners can receive a tax credit for starting a retirement plan, up to $16,500

• Small business owners who haven’t established a retirement plan are in luck! The new law provides a start-up retirement plan credit for smaller employers of $250 per non-highly compensated employee eligible to participate in a workplace retirement plan at work. The minimum credit is $500 and the maximum credit is $5,000.
• This credit would apply to small businesses with up to 100 employees over a 3-year period beginning after December 31, 2019 and applies to 401(k), SIMPLE, SEP, and profit-sharing plans.
• If your retirement plan includes automatic enrollment to encourage participation, you may also receive an additional credit of up to $500 for the first three years of the plan. This new credit is also available to employers that convert an existing 401(k) plan to an automatic enrollment design.

Required minimum distributions (RMDs) now begin at age 72

• Americans are living and working longer than ever before, and this change reflects that shift. Savers will no longer be required to withdraw assets from IRAs and 401(k)s at age 70½.
• RMDs now begin at age 72 for individuals who turn 70½ in 2020.
• If you turned age 70½ in 2019 and have already begun taking your RMDs, we recommend speaking to your financial advisor regarding any 2020 distributions.

You can make IRA contributions beyond age 70½

• As with the new RMD rule, the SECURE Act addresses the increasing number of Americans working past traditional retirement age.
• As of the 2020 tax year, you can continue to contribute to your traditional IRA past age 70½, as long as you are still working.
• Savers can make their 2020 tax year contributions until April 15, 2021.

Small business owners will find it easier to pool together to offer retirement plans

• According to a 2018 study by the U.S. Bureau of Labor Statistics, nearly 40 million private-sector employees do not have access to a retirement plan through their workplace.
• In an attempt to increase retirement access, the new law allows unrelated businesses to join together under an open multiple employer program called a MEP.
• The new law, which goes into effect in 2021, eliminates the IRS’s “one bad apple” rule. This removes the risk of being penalized if one employer in your group fails to satisfy the tax qualification rules for the MEP.

Inherited IRA distributions must be taken within 10 years

• Previously, if you inherited an IRA or 401(k), you could “stretch” your distributions and tax payments out over your life expectancy. This allowed beneficiaries to use stretch IRAs as reliable income sources as they benefited from the tax-advantaged gains.
• Rules have changed for IRAs inherited from original owners who have passed away on or after January 1, 2020. Beneficiaries, generally, must withdraw all plan assets from an inherited retirement plan within 10 years following the death of the account holder.
• The 10-year rule does not apply to: a surviving spouse or a minor child; a disabled or chronically ill beneficiary; and beneficiaries who are less than 10 years younger than the original IRA owner or 401(k) participant.
• If you have an IRA that you planned to leave to beneficiaries, we recommend working with your estate planning attorney or financial advisor to address how might this change your strategy.
• If you’re a beneficiary who has inherited an IRA or 401(k) and the original owner passed away prior to January 1, 2020, you don’t need to make any changes.

You can withdraw money from your retirement account penalty-free upon the birth or adoption of a child

• Bringing a new member into the family can be expensive. The SECURE Act allows savers to take a “birth or adoption distribution” of up to $5,000 from a qualified retirement plan, such as a 401(k) or an IRA, without incurring an early withdrawal penalty.
• This distribution must be taken within one year of the date of birth or adoption finalization.
• If the parents have separate retirement accounts, they can each withdraw $5,000 to help defray the cost of a new child.

529 funds can now be used to pay down student loan debt

• Sometimes families have funds remaining in their college savings plans after their student graduates. Under the new law, you can now use a 529 savings account to pay up to $10,000 in student debt over the course of the student’s lifetime.
• To expand the benefit of tax-advantaged college plans to those who take vocational training, a 529 savings plan may now also be used to pay for qualified apprenticeship programs.

Increased penalty for failure to file federal returns

• Failed to file your tax returns? You may now face a steeper punishment. The Secure Act increases the penalty for failure to file affected federal tax returns to the lesser of: (1) $400 or (2) 100% of the amount of tax due.

• There are also increased penalties for failure to file retirement plan returns, including a higher IRS Form 5500 non-filer penalty.

How else could The SECURE Act impact your retirement?

• Raising the cap on auto enrollment contributions from 10% to 15% in employer-sponsored retirement plans

If you were automatically enrolled in your retirement plan at work, your plan also may have an automatic escalation feature that increases your retirement contributions each year. Under the new law, the amount withheld for your retirement account could go up every year until you are contributing 15% of your income to your retirement savings plan.

The bottom line on the SECURE Act

Changes in life, the tax code, and your own financial circumstances are common–and are a good reminder to update your retirement and estate planning strategies every few years. As the SECURE Act brings changes to retirement, take some time (and work with your financial advisor, if you have one) to help set personal and financial goals.

And if you’re a small business owner not opening a retirement plan, there’s never been a better time to take advantage of the tax benefits of a 401(k). Connect to one of our retirement experts today to learn more.

Your Quick Guide to 2020 Retirement Plan Contribution Limits

Siân Killingsworth / 6 Nov 2019 / 401(k) Resources, IRA Resources, Retirement News

Ubiquity Retirement + Savings: Stay Up-To-Date.

Download our 2020 Contribution Guide

Curious how much you can invest toward your retirement in 2020? The IRS has announced the 2020 contribution limits for retirement and health savings accounts. Changes include increased contribution limits for 401(k) and 403(b) plans, as well as income limits for IRA contribution deductibility. Additionally, the salary threshold to classify “key” and “highly compensated employees” has been announced. Review our quick guide of the updated limits below.

2020 401(k) and 403(b) individual contribution limits (IRS 402(g) Limit)

The IRS has also set limits for the total amount that may be contributed to your retirement savings 401(k) account from all sources combined (IRS section 415 limit). This includes any employer matching or profit-sharing contributions, and any employee after-tax contributions. For 2020, the maximum is $57,000.

Every plan is different, so it’s important to refer to your Plan Document for any compensation or other applicable limits.

2020 Highly Compensated and Key Employee definitions and limits

2020 Roth and Traditional IRA contribution limits

2020 Traditional IRA modified adjusted gross income limit for partial deductibility

2020 Roth IRA modified adjusted gross income phase-out ranges

2020 Simple IRA contribution limits

2020 Health Savings Accounts (HSA) contribution limits

**Catch-up contributions can be made at any time during the year in which the HSA participant turns 55.

If you need more detailed guidance, see IRS Notice 2019-59.

Most Americans are unprepared for retirement — here’s how to fix that

Chad Parks / 20 Aug 2019 / Retirement News

This article originally appeared on Marketwatch

The extended U.S. government shutdown that occurred earlier this year shined an unflattering spotlight on our country’s financial preparedness.

It revealed that many people who wouldn’t typically be considered impoverished are still clearly living paycheck to paycheck. This certainly doesn’t bode well for them saving enough money to be financially independent in retirement.

Now, more than ever, retirement is built on personal savings and it’s up to the individual — not the government or employers — to make that dream a reality. The notion of working your entire life while simultaneously stashing away money for your future is something I frequently refer to as, “the great retirement experiment.” Let’s take a look at how we got here.

How our modern retirement system came to be

Before the 20th century, our country’s economy was based almost entirely on agriculture. Americans didn’t have hopes or dreams about retirement in the 1700s, 1800s or even early 1900s. They simply worked until they no longer could, and hoped that their families would take care of them in old age.

The retirement system that we know of today didn’t come into existence until after World War II. Following the war, companies hired people in droves and provided pensions. At the time, this was the best concept available for retirement security and many people from this generation benefited. My grandparents, for example, retired with a full pension and my father retired with a partial pension. As time went on, however, companies realized funding these programs entailed a lot of complexity and decided to freeze pensions or stop offering them altogether.

In the late 1970s, the government recognized these resources wouldn’t sufficiently support people through their retirement years, so it implemented tax-deferred savings accounts and the 401(k) was born shortly thereafter in the early 1980s.

The broken three-legged stool of retirement

Over many decades, we have come to think of retirement as a three-legged stool consisting of Social Security, a pension and personal savings, all working together to fund your retirement. Today, the three-legged stool looks more like a pogo stick.

Social Security, the first leg, is projected to have a reduction in benefits by 2034, if no changes are made today. This program was introduced in 1935 and originally designed to help those in dire need of financial assistance. It was never intended to be relied on as heavily as it is today as a primary means of retirement income.

Personal pensions, the second leg, have recently seen a staggering, swift disappearance. This chart, provided by CNN Business with data from Pension Benefit Guaranty Corporation, depicts the shrinking population of workers covered by company pensions. Today, the majority of workers don’t expect to see a pension unless they’re unionized or government employees.

With pensions nearly extinct and Social Security looking less and less reliable as a means of income, the onus is now largely on individual citizens to save enough money during their lifetimes for retirement, serving as the vital “pogo stick” leg of the stool. Realistically speaking, can people bear that burden?

This is why we call it the great retirement experiment. Although the outcome is unknown, it must be brought to light.

The challenge is that not everyone takes a diligent and responsible approach to saving for retirement on their own, nor should they be expected to. We have asked everyday people to become both financial and investment experts, which ultimately may set them up for failure. Not to mention, people are now living longer than ever before and working later in life to fund retirement or catch up on lost savings.

How defaulting to Social Security could change it all

So, how can we solve the issue of underfunded retirements? While there is no surefire solution, I believe a significant adjustment to our Social Security system could alleviate much of the burden currently placed on everyday Americans.

Let’s keep Social Security as we know it today, the same. However, let’s augment the required Social Security savings from both the employer and the employee by doubling the amount saved, which would add an additional 12.4% (6.2% employer contribution, 6.2% personal contribution, doubling it would increase it to 24.8%) of income contributed to retirement. This could be credited into an account that is in the individual’s name so they have complete control over the investments, but won’t be able to access to the funds until normal retirement age.

Retirement accounts like 401(k)s and IRAs would still be in play, just not as the main source of income. This also solves the portability issues with retirement accounts. If the Social Security account is already under an individual’s ownership, it doesn’t matter how often you change jobs.

Bottom line, our retirement system is not as good as it gets. Savers must be aware of the flaws in the existing retirement savings experiment as well as the great responsibility of saving for their own future.