I’ve spoken before about a new law Congress passed called the SECURE Act which stands for “Setting Every Community Up For Retirement Enhancement.” (Boy, they really stretch it sometimes to come up with a cute name, don’t you think?) Well, the act was signed into law by President Trump just before Christmas, so let’s take a look at what’s actually in the new legislation to find out how it may impact your personal retirement planning.
The SECURE Act is intended to improve retirement security. However, some financial advisors don’t see the bill as having very much of a substantial impact, and still others think that portions of the legislation may do more to harm, rather than to help some retirement account holders.
So I want to examine the major provisions of the bill one by one to help you learn just what effects it may have for you, personally.
Helping Employees Of Small Businesses
One key part of the SECURE Act is aimed at creating new retirement plan options for employees of small businesses. In the past, employees haven’t had much access to employer-sponsored plans because small businesses simply haven’t offered such plans. The SECURE Act now offers small businesses a tax incentive for offering these plans to their employees. It also provides greater access to multiple employer plans. A multiple employer plan is a plan maintained by two or more employers who are not related.
Importantly, it eliminates the “one bad apple” rule that means that if just one company in a multiple employer plan failed to meet the plan requirements, then the plan would fail for all the companies involved. That would discourage many small businesses from considering such plans, discouraging them to pool their plans together, which would have given them access to more features at affordable prices. So they fixed that.
Another part of the act benefits the many part-time employees by lowering the “hours worked” requirement to qualify to put a part of their pay into a plan. Under the new legislation, part-time workers can qualify for retirement plan participation by working at least 1,000 hours in one year or at least 500 hours per year in three consecutive years. So that makes it easier for part-time employees to participate.
The SECURE Act also aims to increase automatic enrollment of employees by offering tax credits to businesses that put in auto-enrollment plans into effect. Small businesses can get an additional tax credit beyond the credit offered for setting up a retirement plan if they create a 401(k) or SIMPLE IRA plan that includes auto-enrollment. The government likes auto-enrollment, so should you because instead of making a decision to join or not join, you are automatically enrolled and, really, that is for your best interest.
New Rules On Annuities In 401(k) plans
One somewhat controversial provision of the SECURE Act widens the possibilities for employers to offer annuities as an option in their 401(k) plans. Under previous law, many employers shied away from offering annuities because it came with the fiduciary responsibility of ensuring that they were appropriate for an employee’s investment portfolio. The new act shifts that fiduciary responsibility to the insurance company that actually sells the annuity.
We know the insurance industry lobbied strongly for the act, but all I can say about this is “buyer beware” as annuities are complex investments that haven’t had the best track record after taking into account expenses and other costs. I would strongly urge anyone considering these to talk with a financial advisor before purchasing one.
However, not all annuities are bad. Some annuities do offer the benefit of providing a guaranteed income for life after retirement, and that’s an important factor to consider with so many people living longer lives.
Changes For Required Minimum Distributions And Retirement Contributions
Some of the most important parts of the SECURE Act have to do with retirement plan contributions to and required minimum distributions from a retirement plan. Here’s a feature many will like. The act completely eliminates the maximum age to contribute to a traditional IRA. This allows people to keep saving in an IRA if their situation warrants it. It’s a good thing.
On the distribution side, 70 and a half was also previously the age at which people with a 401(k) or IRA plan had to begin taking yearly required minimum distributions—RMDs. The SECURE act ups the age to 72 years old. One note of caution though for those of you who reached 70 and a half years of age in 2019: you will still need to withdraw your required minimum distribution for 2019 and you have to do so by April 1st, 2020. That’s important because failing to do that results in a very hefty 50% penalty. The new, higher age limit only applies to people reaching 70 and a half years of age in 2020 or beyond.
Changes For Inherited Accounts
One final part of the SECURE Act that I want to mention concerns the required minimum distributions for those that inherit an IRA and are not the spouse of the decedent. The previous law allowed non-spousal inheritors to spread out the requirement distributions over their entire own life span. That was pretty good because if you were young, you could just take a little bit each year for the rest of your life. The SECURE Act significantly changes that. The new rule requires non-spousal beneficiaries to withdraw all the money within 10 years. There is no rule that you have to take it in regular annual payments or in any specific year during the ten years, just that all has to be withdrawn at the end of ten years.
This is a change in the law that may create some tax problems for people who inherit such an account when they’re in their peak earning years. If you’re already doing well and paying higher taxes, this could bump up your taxes considerably. If that’s your situation, I suggest talking with a financial advisor or CPA to figure out the best way to take distributions within that 10-year time limit.
Those are the major changes contained in the SECURE Act. Just for a quick review, this new legislation means:
- More access to employer-sponsored retirement plans for employees of small businesses and also part-time employees
- Increased automatic enrollment retirement option plans
- More retirement plans offering annuities as an investment option
- An increase in the beginning age for required minimum distributions to age 72
- Elimination of the top age for retirement plan contributions
- And, finally, a 10-year limit for withdrawing all the money in an inherited retirement plan for non-spousal inheritors.
See, now you don’t have to read through all the boring IRS language. I‘ve done that for you. Now, just go to our website, print this out or save it to your computer for future reference.
And what’s the website address? Of course, it’s Stevepomeranz.com, that’s stevepomeranz.com.
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