In a surprising turn of events, Congress passed some of the most significant retirement legislation in more than a decade last week. The SECURE (Setting Every Community Up for Retirement Enhancement) Act had been stalled for years but was unexpectedly attached to a bipartisan spending bill and signed into law by the President in an attempt to avoid a government shutdown.
The Act is designed to help Americans save more for retirement and to enable small employers to offer more retirement savings options. Among the major provisions of the Act are:
Delayed age for required minimum distributions (RMDs) – The Act increases the age to begin making RMDs from retirement plans to 72 (formerly 70.5), allowing tax-deferred savings to grow even longer. This option would be available to anyone who does not reach the age of 70.5 in 2019.
Removal of IRA age limitation – Taxpayers who work past the age of 70.5 would be able to continue to contribute to IRAs under the Act, expanding the available retirement planning strategies later in life.
Removal of the RMD provisions for stretch IRAs – One of the negative features of the Act is the provision that disallows beneficiaries from stretching RMDs out over their lifetimes. Instead, they will be required to take all RMDs by the end of the tenth year after the trust owner’s death. It is crucial to strategically plan for this change because it will force many beneficiaries of retirement plans and trusts to take RMDs when they are in the highest tax brackets of their lives.
“Pass-through” trusts that were created prior to this bill will also need to be updated to conform to the SECURE Act language, or else risk restricted access to funds.
Inherited IRAs that were already in existence in 2019 are exempt from the new law. For surviving spouses, disclaimers of rollover IRAs may be a viable option to allow for the use of old law.
Motivation for small employers to offer retirement plans – The Act allows small employers, who might not otherwise be able to offer retirement savings to employees, to join forces with other small employers to set up and offer a plan while incurring lower liability and costs.
The Act also offers a new tax credit of $500 for employers who offer automatic enrollment into retirement plans. The benefit is two-fold: the credit could help offset some of the up-front costs for the employer, while automatic enrollment could increase employee participation.
Increased annuity options within retirement plans – By updating safe harbor provisions, the Act alleviates some of the liability around picking an annuity provider and could potentially motivate more 401(k) plan sponsors to include annuities.
No withdrawal penalties for qualified births or adoptions – Taxpayers experiencing a qualified birth or adoption will be able to withdraw up to $5,000 from their retirement account without the 10% distribution penalty. Keep in mind that this withdrawal will still trigger a tax obligation, which could coincide with increased childcare costs and other expenses.
Lifetime income disclosure for defined contribution plans – Defined contribution plans would be required to annually provide participants with a lifetime income disclosure, which would show how much income the the retirement account could generate.
The SECURE Act will have an overall positive impact on retirement savings, but it will also trigger the need for many taxpayers to reassess their estate and retirement plans to ensure maximum benefit and minimal risk.