Changes to Retirement Benefits: Highlights from the SECURE Act

Although discussed throughout 2019, Congress finally passed, and the President signed into law, a bill focused on improving retirement for Americans. This bill, called the SECURE Act (Setting Every Community Up for Retirement Enhancement), provides significant bi-partisan retirement policy reforms for individuals and for businesses offering retirement plans. While the law itself is more than 100 pages long and contains many changes, we have highlighted and summarized some of the key reforms that will have the largest or most direct impact on individuals and/or business owners.

Prior to the passage of the SECURE Act, most individuals were generally required to begin taking minimum distributions (called “RMDs”) from their IRAs and qualified employer plans in the year they turned 70 ½. The SECURE Act now allows you to wait until age 72 to begin taking RMDs, provided you turn age 70 ½ after January 1, 2020. For those not yet needing to draw upon their IRAs and qualified plan monies, this change in the law provides additional time for account balances to grow tax-deferred. For those who had already reached age 70 ½ by December 31, 2019, the old rules still apply.

Under the old law, a non-spouse IRA beneficiary was permitted to use his/her own life expectancy when calculating the RMDs on an inherited IRA. Since most IRA beneficiaries are younger than the original account owner, this enabled beneficiaries to “stretch” the RMDs out over a longer period (sometimes a much longer period), allowing them to capture additional tax-deferred benefits. Unfortunately, the new law requires that nearly all inherited IRAs for non-spouse beneficiaries be distributed within 10 years of the original IRA owner’s death. Exceptions to this new rule apply to disabled or chronically ill beneficiaries, beneficiaries fewer than 10 years younger than the decedent, and children of the decedent under the age of 18 (once they reach age 18, the new 10-year provision applies).

This provision of the new law is the only significant “take-away” from taxpayers, as it will negatively impact the ability of families to accumulate and preserve tax-deferred wealth. To minimize the impact of this change, it will be important for non-spouse beneficiaries to time the distributions during the new 10-year payout period in a way that minimizes their overall income tax consequences. The law does not provide a set schedule for distributions; it simply states that the account must be fully distributed by the end of the tenth year—effectively giving taxpayers a planning opportunity.

Until the passage of the SECURE Act, a working taxpayer over the age of 70 ½ was not eligible to contribute to a traditional IRA even if he/she had earned income. The new law now allows contributions to be made to a traditional IRA up to the maximum IRA limit (or the earned income level, if less) for as long as a taxpayer is still working. For individuals attempting to maximize their retirement savings in the latter part of their working years, this affords a great opportunity to continue making use of a tax-deferred arrangement.

Under old law, a part-time employee was usually excluded from participation in his/her employer’s 401(k) retirement plan unless he/she worked more than 1,000 hours per year. The SECURE Act reduces the annual threshold to 500 hours, provided the employee works that much for three consecutive years. Thus, as long as the individual will be age 21 by the end of those three years and works more than 500 hours per year, he/she will be eligible to participate in the employer 401(k) plan and make elective contributions to the plan. (The law does not require that these part-time employees receive employer matching contributions, but an employer may choose to include them when making such contributions).

For some time now, a small business has been able to take advantage of a $500 tax credit for the first three years it has a 401(k) plan. The SECURE Act increases this amount to as much as $5,000, depending on how many non-highly compensated employees are eligible to participate in the plan. Additionally, the new law creates a new credit of up to $500 per year for employers who establish a 401(k) plan that includes an automatic enrollment feature. Thus, the tax credit for offering a new 401(k) plan can now be as high as $5,500 per year, for up to three years.

Other interesting provisions of the SECURE Act providing greater savings incentives and distribution flexibility include:

• Education-related Benefits – 529 Savings Plan monies can now be used to pay principal and/or interest on qualified student loans for a beneficiary of a 529 Plan – up to a lifetime limit of $10,000.
• Assistance with Childbirth or Adoption Expenses – As much as $5,000 may now be distributed penalty-free (but not tax-free for tax-deferred accounts) from an IRA or retirement plan to help cover the cost of a qualified birth or adoption. The Act seems to indicate that the $5,000 limit is a per-event limit (not a lifetime limit), and for a married couple, the limit is effectively doubled if they each have their own retirement plan.

Dean Dorton’s tax advisors and/or Dean Dorton Wealth Management’s wealth advisors would be pleased to assist you in understanding and applying these new provisions in a way that is most advantageous for you. Feel free to reach out to your primary contact at Dean Dorton, or call or email David Parks of Dean Dorton Wealth Management at 859-425-7782 or dparks@deandortonwealth.com.