June 18, 2020
Here we take a moment to discuss the SECURE Act, an act responsible for major changes to financial planning options.
A Word from the Co-Editors
Kit-Victoria (Weil) Wells – Culture & Communications Officer
Catalina Cherny-Santos – Client Services Manager
We are living in the grasp of extraordinary times. History is being made on multiple fronts; medically, economically, and culturally. We are all grappling to interpret the daily-changing information and understand its implications.
At WEIL, during times of anxiety, volatility, and uncertainty (nay, extraordinary times) we stick to the basics. We show up and we work, each of us bringing our own special expertise to the thinking of the team, channeling our historic experience and our evolving understanding for the benefit of those who have entrusted us with their financial lives.
While you might expect us to take this mid-quarter newsletter as an opportunity to write about the CARES act, our Advisory team decided that readers may have had their fair share of CARES act articles. As such they decided that a review of the SECURE act of 2019, “the other” act responsible for major changes to your financial planning options, might be of value.
A Review of the SECURE Act Robert Gaan, CFP® – Lead Advisor
In December 2019, President Trump signed into law the Setting Every Community Up for Retirement Enhancement Act of 2019, otherwise known as the SECURE Act. The law includes new provisions aimed at increasing access to tax-advantaged accounts to promote saving for retirement. It also changed the rules regarding taking distributions from existing retirement plans. Here is a brief summary of the changes to the law that took effect on January 1, 2020:
Increasing the required minimum distribution age: Under previous law, holders of retirement plans had to withdraw required minimum distributions (RMDs) from their retirement accounts annually, starting in the year they turned age 70 1⁄2. The SECURE Act increased the RMD age to 72 for retirement account holders who had not already reached age 70 1⁄2 in 2019. This allows for greater tax-deferred growth opportunities for those individuals who can and wish to delay drawing from their retirement accounts for living expenses.
*Note* The CARES act eliminated the RMD requirement for 2020, but in 2021 the rules described above regarding the SECURE Act will come back into force. If we haven’t already discussed it, please give us a call to help you strategize whether or not it makes sense to waive your RMD for 2020.
Eliminating the maximum IRA contribution age: The law also eliminates the maximum age for making new traditional IRA contributions (which was previously capped at 70 1⁄2 years old). Now, you can make contributions to an IRA at any age as long as you have earned income from working. For married couples filing jointly, non-working spouses can also contribute to a spousal IRA, subject to certain contribution limits.
No more “stretch” IRAs: Under the prior law, non-spousal IRA beneficiaries (i.e. children) could withdraw from inherited retirement accounts over their own life expectancy, which could range from a few years to a few decades. The SECURE Act now requires beneficiaries withdraw all assets from an inherited retirement account within 10 years of receipt. There are no RMDs within those 10 years, but the entire balance must be distributed by the end of the 10th year. This change may be problematic for some beneficiaries, especially if they are in their 40s and 50s and at the peak of their earning years. Limiting the time frame over which someone can distribute money from an inherited retirement account could potentially create an undue tax burden for beneficiaries. Beneficiaries already “stretching” an inherited IRA are not affected by this change in the law.
Annuities in 401(k) plans: The SECURE Act enables more employers to offer annuities as investment options within 401(k) plans. Annuities can provide a guaranteed income over the course of a retiree’s lifetime. Proponents say annuities can offer a steady stream of money to retirees in the long-term, and also encourages savers to think about the far-off future. However, annuities are complex investment products, and could result in hefty fees and penalties if used incorrectly.
Employer plans for small businesses: The law widens access to multiple employer plans for small businesses. Previously, companies may have avoided participating in that type of program because of the so- called “one bad apple rule” that stated if one employer did not meet the plan requirements, the plan would fail for all others involved. Under the SECURE Act, employers no longer have to share “a common characteristic,” such as being in the same industry. Also, the bill expands access to employer retirement plans to long-term part-time workers by lowering the minimum number of hours worked. Previously, employers did not have to invite workers who clock less than 1,000 hours each year to participate in a retirement plan, but the SECURE Act drops the threshold for eligibility down to either one full-year with 1,000 hours worked or three consecutive years of at least 500 hours each.
Encouraging auto-enrollment: Another aspect of the SECURE Act is a tax credit for employers who automatically enroll workers into their retirement plans. Small employers can get a tax credit to offset the costs of starting a 401(k) or SIMPLE IRA plan with auto-enrollment, in addition to the start-up credit they already receive.
Assets in a 529 Education Savings Plan can be used to repay student debt: Assets in a 529 college savings accounts can now be used to repay up to a maximum of $10,000 of a student’s loan(s). An unlimited amount of students are eligible but must be related to the 529 account beneficiary.
*Note* The CARES act has suspended all Federal Student Loan payments and interest accruals through September 30, 2020. Some non-federal student loan programs have done the same, but we recommend calling your lender or loan administrator to determine their exact policy and how you should proceed.
Many of these changes give rise to opportunities for creative planning. We encourage clients to call us so we can talk about whether the SECURE Act has created an opportunity that may be to your advantage.
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