The “Setting Every Community Up for Retirement Enhancement Act” (SECURE Act) of 2019 - went into effect in January of 2020. The act has several new provisions that affect couples who are planning for their retirement, to young professionals trying to navigate inheritance. Let’s review a few key points of the SECURE Act, and how they might impact you.
Gifting (Or Inheriting) an IRA
Have you inherited an IRA since the SECURE Act went into effect? Are you thinking of gifting your IRA someday as part of your estate plan? Historically, IRAs were subject to something called the “STRETCH IRA” provision. This meant that, if an IRA was gifted to a non-spouse, they could “stretch” distributions from the inherited IRA over the course of their lifetime. The stretch provision allows you to spread taxable distributions over your lifetime instead of taking one large taxable distribution.
Now, the SECURE Act has changed how inherited IRAs can be distributed. For most designated beneficiaries who inherit in 2020 and beyond, the new standard under the SECURE Act will be for beneficiaries to fully distribute their inherited accounts within 10 years. Within that 10-year period, beneficiaries can empty the account, or take distributions - but the account needs to be empty when the 10 years are up.
There are a few exceptions to this new rule. Spousal beneficiaries, chronically ill beneficiaries, disabled beneficiaries, individuals who are 10 years younger or less than the deceased, and certain minor children all qualify as “eligible beneficiaries” who sidestep the new 10-year requirement. In other words, all eligible beneficiaries will be able to withdraw funds from an inherited IRA over the course of their lifetime - they aren’t limited to 10 years after the inheritance.
Small Business Owners
The SECURE Act impacts small business owners in a handful of ways. First and foremost, the SECURE Act created more flexibility for Pooled Employer Plans (PEPs). These plans allow multiple employers who aren’t connected to pool their resources and offer a company 401(k) together for all of their employees. Ideally, this will lower costs for employers, and make it easier for them to offer retirement plans for their workers.
You may be interested in pursuing this option because all company contributions to employee 401(k) plans are tax-deductible. Additionally, there are some tax credits available to small businesses who set up a company 401(k).
Small business owners will now also be eligible for a maximum tax credit of up to $5,500 per year for the first three years for opening up a company 401(k). This credit is intended to help cover administrative costs, and incentivize small business owners to support themselves and their employees with a 401(k).
Planning for Retirement
Another new provision is the changes that have been made to Required Minimum Distributions (RMDs). Historically, you had to start taking RMDs from tax-deferred accounts at age 70 ½. Any traditional 401(k) or IRA had to be part of your retirement income plan from age 70 ½ on. Now, RMDs don’t have to be taken until age 72.
Of course, you can start taking distributions from tax-advantaged accounts as soon as age 59 ½. Whether or not you start taking withdrawals depends on your retirement income strategy. Retirees have the option to pull from their tax-deferred retirement accounts (like a 401(k)) and after-tax retirement accounts (like a Roth IRA). With a later RMD age requirement, you can save money on taxes in retirement, and get a little bit of extra mileage out of your savings.
However, some retirees have an alternate source of income in retirement. They might choose to freelance, pursue consulting, or find that payments from their employee pension plan or investment dividends cover the majority of their expenses. By increasing the age where RMDs become mandatory, retirees have a little bit more flexibility in putting together an income plan that works for them.
Whether you’re nearing retirement, or you’re in the sandwich generation and caring for retiree parents, this is important to know.
Retirement Plan Contributions
The SECURE Act also allows you to contribute to a tax-deferred account beyond age 70 ½, which wasn’t the case. For individuals or couples who are bringing in an income after age 70 ½, this is fantastic news!
It’s becoming more and more common for people in their 70s to continue working in some capacity. This new provision means that if you extend your career, you can keep contributing to your retirement accounts and take advantage of compound interest. It’s a great way to keep building your savings or boost your net worth to leave a lasting legacy for your family.
Do you have questions about how the SECURE Act will impact you? Reach out to your tax professional or financial planning team. It’s important to know exactly how you can navigate the changes the SECURE Act brings, and to make sure you’re still maximizing your wealth as a result!