On December 20, 2019, President Trump signed into law the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 (the “Act”). The Act includes a number of retirement savings and employee benefit changes, which are intended to strengthen retirement security. The summary below explains significant changes made to retirement plans by the Act.
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Increasing the Required Minimum Distribution Age
Under the previous law, individuals with 401(k) or traditional IRA accounts had to make a required minimum distribution (RMD) in the year which he or she turned 70 ½. The SECURE Act increases that age to 72. The 70 ½ age was based on life expectancies from the early 1960s and had not been updated.
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Individuals who turned 70 ½ years old in 2019 will still need to withdraw their RMD this year. However, individuals who turn 70 ½ years old in 2020 will not be required to withdraw their RMD until the age of 72.
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Increasing the Maximum Contribution Age for Traditional IRAs
Under the previous law, the maximum age to make contributions to a traditional IRA was capped at 70 ½. The bill eliminates this age provision and allows individuals to make traditional IRA contributions later in life if they have earned income.
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Eliminating Stretch IRAs
Under the previous law, non-spousal beneficiaries could take distributions from an inherited IRA over their lifetime. This was often used as a savvy wealth transfer technique, as the tax deferred nature of the accounts could extend for many more decades when these accounts were given to grandchildren. The SECURE Act requires non-spousal beneficiaries to withdraw all assets of an inherited account within ten years of the death of the owner and there are no RMDs within those 10 years.
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Note: This does not impact the distribution rules for spouses. Spouses can generally postpone distributions from an inherited IRA until they reach 70 ½ (now 72) or they can start to take distributions immediately.
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Other Provisions of Note:
- The SECURE Act opens the gates for more employers to offer annuities as investment options within 401(k) plans. Annuities can offer a steady stream of money to retirees in the long-term and encourage savers to think about the far-off future.
- To promote additional savings, the SECURE Act allows automatic-enrollment safe harbor plans to increase the cap on raising payroll contributions from 10 percent to 15 percent of an employee’s paycheck, while giving employees an opportunity to opt out of the increase.
- Enables businesses to include part time employees who work either 1,000 hours throughout a year or have three consecutive years of 500 hours.
- The law offers a $500 tax credit for employers that automatically enroll employees into a retirement plan.
- Permits penalty-free withdrawals of up to $5,000 from 401(K) plans to cover the costs of having or adopting a child.
- Simplifies the process to allow a group of small, unrelated businesses to create a Multiple Employer Retirement plan.
- Significantly increases the penalty for failure to file a Form 5500 to $250 per day.
- Plan participants can no longer access plan loans through the use of credit cards.
If you have any questions regarding this article, please contact Jamie Downey at 800-849-6022 or at JMDowney@DowneyCoCPA.com.
