What You Need to Know About the SECURE Act
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.
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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.