In December 2019, the Further Consolidated Appropriations Act was signed into law, included in that law was the Setting Every Community Up for Retirement Enhancement Act, commonly known as the SECURE Act. The SECURE Act made significant changes to retirement savings programs and employee benefits.
Some good, some not so good.
One positive aspect of the SECURE Act is that it incentivizes small businesses to create either a 401(k) or SIMPLE IRA plan with automatic enrollment by giving a $500 tax credit per employee. It even allows part-time employee who work either 1,000 hours a year or have three consecutive years with 500 hours each year to participate in the plan.
Another positive aspect, only if you turned 70½ after Dec. 31, 2019, is that you don’t have to take your required minimum distribution (RMD) from your IRA until age 72. This additional year and a half gives your account more time to grow, tax-deferred, before distributions need to be taken. For those who were required to withdraw before December 2019, nothing changes. You still must take your RMD as usual.
It’s important to note that for calendar year 2020, because of the COVID-19 pandemic, Congress passed the CARES Act — which waives the RMD requirement for all individuals. I haven’t heard if there will be an extension on this for 2021, but with the new administration taking over, economic relief legislation will be on the front burner.
According to the U.S. Census Bureau, 20 percent of those in their 70s continue to work. Prior to the SECURE Act, they were not allowed to contribute to their IRAs. Now there is no age limit for making IRA contributions.
There are also provisions for a $5,000, penalty-free withdrawal from an individual’s retirement plan for the birth or adoption of a child. As well as utilizing funds from 529 plans for parents to reduce their children’s student loans by a lifetime withdrawal of $10,000 per child.
Remember how your financial planner told you how your IRA could be “stretched” and last for several generations after you’re gone? Well, Congress was listening too.
The SECURE Act implemented a major change to the distribution rules for non-spousal beneficiaries. Prior to the Act, if you left your IRA to your children, they were only required to take out the RMD amount you were taking. Depending on their age, this could stretch the payout throughout their lifetime and beyond. Now an inherited IRA must be fully distributed within 10 years.
The required 10-year time frame will result in larger distributions, which means a larger tax liability. Come on — someone has to pay for those corporate tax breaks, and it might as well be us “peasants.”
There is one saving grace. The distribution can be taken at anytime during the 10 years. So, in a low-income year you can take the funds — or if you’re close to retirement you can wait. But in 10 years yorr account must be empty.
There are a few exceptions to the 10-year rule for eligible designated beneficiaries (EDBs):
- A surviving spouse;
- A minor child (10-year rule starts at age 18);
- A disabled individual (defined by IRS Code 72(m)(7);
- A chronically ill individual (defined by IRS Code 7702B©(2); or
- An individual who is not more than 10 years younger than the deceased account owner.
Even though a surviving spouse is listed as an EDB, they still have the right to roll over the deceased spouse’s IRA into his or her own IRA, which for them makes life easier.
The SECURE Act does not impact plans inherited before 2020. The 10-year limitation only applies to retirement accounts inherited in 2020 and beyond. If you inherit an IRA, it is imperative that you work with an attorney, financial adviser, and accountant to determine the most advantageous way to take your distribution based on your personal needs and situation.
- Quick segue to Medicare. Remember: From January thru March, if you are on a Medicare Advantage plan, you can still review and make a one-time change if you deem it necessary. Call me for details.