How Will the SECURE Act Affect your Retirement Savings Plan? by Adam Slavin, CPA
Posted on January 07, 2020
The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) was signed into law at the end of December to help more Americans prepare and plan for greater financial security during their retirement years.
As the average life span increases, people need to save more of their income during their working years to improve the chances that they can maintain their standard of living in retirement. The problem is that not all workers have access to employer-retirement plans, and those who do are not saving enough to afford the comfortable retirement that they envisioned for their later years. In fact, according to a 2018 study conducted by the Federal Reserve Bank, almost a quarter of adults in the U.S. have no retirement savings or pension, and only 36 percent of non-retired adults think that they are on track to meet their ultimate retirement savings goals. The SECURE Act aims to change these sobering statistics.
Here are the details of what is included in the Setting Every Community Up for Retirement Enhancement (SECURE) Act and how it may affect you.
Raises the Age for Required Minimum Distributions from Tax-Deferred Accounts to 72
Taxpayers may wait an additional one-and-a half-years until they must begin taking required minimum distributions (RMDs) from their tax-deferred retirement accounts, such as 401(k)s and traditional individual retirement accounts (IRAs).
Raising the RMD age from 70 ½ to 72 eliminates many of the complexities taxpayers previously encountered when trying to abide by the distribution rules based on their half-year birthdays. In addition, high-net-worth individuals who do not necessarily need to rely on these savings accounts for financial support in retirement may instead receive the benefit of an extra one-and-a-half years of tax deferred earnings.
Eliminates Age Cap on IRA Contributions
Under the SECURE Act, individuals who are still working and earning income after age 70 ½ may continue to save money in a tax-deferred IRA.
Provides Part-Time Workers with Access to Workplace Retirement Savings Plans
Beginning in 2021, part-time employees who have worked at least 500 hours per year over the past three years will be eligible to participate in 401(k) plans sponsored by their employers, provided they are at least 21 years old at the end of the three-year period. Previously, participation in these plans was limited to full-time employees who worked more than 1,000 hours each year.
While businesses may decide to extend retirement plan benefits to qualifying part-time workers, they will not be required to offer part-time employees the same employer match they offer full-time staff.
Makes it Easier for Small Businesses to Offer Retirement Benefits
Beginning in 2021, unrelated small businesses may band together and create one singular multiple employer plan (MEP) offering tax-advantaged retirement savings opportunities to all the participating companies’ employees. Not only does this provision help small businesses compete in attracting and retaining qualified staff, it may also provide tax benefits to help offset the costs of offering these plans to workers. Companies that adopt MEPs may be eligible to receive a tax credit of as much as $5,000 annually for three years as well as an annual $500 tax credit for three years when they automatically enroll their employees in those plans. In addition, the law allows businesses participating in MEPs to file consolidated annual returns for similar plans using IRS Form 5500.
Increases Automatic Enrollment Contribution Limits
When a retirement plan has automatic-enrollment and automatic-escalation safe harbor features, the sponsoring company may now increase the default employee contribution from 3 percent of salary to 6 percent in the first year and as much as 15 percent beginning in the worker’s second year of employment. Previously, employers could not set a plan participant’s automatic contribution to an amount exceeding 10 percent in any year.
Introduces Guaranteed Income Annuities as Investment Options
The new law opens the door for 401(k) plan sponsors to offer annuities as investment options to plan participants without increasing the sponsoring businesses’ exposure to legal liabilities. While these insurance contracts offer investors the promise of guaranteed income in retirement, they are not without risks. Investors should speak with their CPAs and financial advisors to get all the facts before jumping into annuities with both feet.
Allows Penalty-Free Early Withdrawals for a Child’s Birth or Adoption
Participants in employer-sponsored 401(k) plans and IRAs now have up to one year following the birth of a child or adoption of a child younger than 18 years old to take $5,000 per spouse from their individual plans without incurring a 10 percent early-withdrawal penalty. The amount withdrawn will be subject to income tax, but any recontributed amounts will be treated as rollovers rather than taxable income.
Forces Faster Withdrawals from Inherited IRAs
One of the more disappointing provisions of the SECURE Act requires that an individual who inherits a tax-advantaged retirement account from a non-spouse decedent must empty that account within 10 years of the original owner’s death and pay the taxes due. Previously, non-spouse beneficiaries of inherited qualified plans could allow those savings to continue to grow tax-free and stretch out taxable withdrawals over their lifetimes. As a result of the new 10-year rule, a young beneficiary to a sizable IRA could be put into a much higher tax bracket based on the required distributions he or she must withdraw from that account. This change will require many individuals to rethink their estate plans and meet with their CPAs and financial advisors to consider other planning tools, including Roth IRAs and Roth 401(k)s, that may provide better tax savings during life and after death.
About the Author: Adam Slavin, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practices, where he provides tax planning and consulting services to high-net-worth individuals and closely held business. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at firstname.lastname@example.org.