This past December, the US Senate approved a $1.4 billion dollar spending deal that includes the Setting Every Community Up for Retirement Enhancement (SECURE) Act, conceived to assist Americans better plan and save for retirement. The Act brings some of the most significant changes to retirement savings laws we have seen in quite some time. For some, the changes enacted will require a change in overall retirement planning strategy, while others may not be affected until farther down the road.
So how will the SECURE Act affect you?
Delayed Required Minimum Distribution (RMD): Until now, you were required to begin taking mandatory distributions from your non-Roth IRAs at age 70 ½. However, now you can wait until age 72 to begin drawing down your savings. This extension allows you to keep your money in a tax-deferred account for an additional 18 months before needing to take an RMD.
This is great news if you aren’t in need of your IRA income at age 70 ½ and prefer to allow your money to continue growing tax-deferred. However, this may impact how and when you claim social security benefits and/or your overall retirement tax planning strategy.
This rule only affects those individuals turning 70 ½ in 2020. If you turned 70 ½ in 2019, you are not eligible to wait until age 72 and must begin taking your RMDs on the original schedule.
Elimination of Age Limits on IRA Contributions: One of the most welcomed changes is the elimination of the age limit for traditional IRA contributions. Before the SECURE Act, you were only allowed to contribute to your non-Roth IRA until age 70 ½ when you began taking your RMDs, even if you were still working. Under this new law, though, you can continue to make contributions as long as you meet the earned income requirement. That is, you can continue to put money into your IRA as long as your contributions are coming from earned income, not social security benefits, annuity payments, or payouts from other retirement plans, to name a few. It’s best to consult with your advisor on what the best savings strategy is for you.
The New Stretch Limit on Inherited IRAs: The “stretch IRA” was an estate planning strategy that allowed non-spouse beneficiaries of non-Roth IRAs to keep assets of the IRA in an inherited account and spread the distributions out over the course of their lifetime. This “stretching” out of distributions allowed the beneficiary to spread the tax burden out over their lifetime while keeping the remainder of the inherited funds invested.
Now, however, the “stretch” allowance has been eliminated and beneficiaries must liquidate all assets in the inherited IRA within ten years. There are a few exceptions, however, for spouses, the disabled, minor children (until they turn 18), and individuals not more than ten years younger than the account holder.
Retirement Planning Changes for Small Businesses: There are several major provisions of the SECURE Act that will impact how small business owners and employees save for retirement.
- Pooled Employer Plans (PEP): Pooled employer plans are a type of Multiple Employer Plan (MEP) previously only available to employers within the same field or sharing a common “characteristic.” Now, though, small employers that are not connected or affiliated can join together in the same overall 401 (k) plan. The idea behind this provision is that it will increase access to employer-sponsored retirement plans by lowering the costs of plans themselves, but the efficacy of this approach is yet to be seen. The operational complexities of coordinating multiple payrolls and having multiple employers may “zero out” any savings hoped to be gained by participating in this type of plan.
- Part-Time Employee Access: Previously, small business retirement plans were not offered to employees who worked fewer than 1,000 hours in the space of a year. Now, employees who have accrued at least 500 hours for three consecutive years are eligible to participate.
The retirement planning revisions under the SECURE Act will have a greater impact on some more than others. As your wealth managers, we make it our priority to keep abreast of such changes and recommend adjustments to your retirement plan as needed.
If you do, however, have questions about how these changes might affect your plans, you are always welcome to schedule a call or come in and meet with us to discuss them.
Disclaimer: This information is provided for general purposes and is subject to change without notice. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the information, please consult your Financial Advisor for individual financial advice based on your personal circumstances. Neither Harbor West nor Geneos Wealth Management, Inc. provide tax or legal advice. Harbor West is a division of NorthEast Community Bank. Securities and advisory Services offered through Geneos Wealth Management, Inc. FINRA/SIPC Investment Advisory and Financial Planning Services offered through Geneos Wealth Management, Inc. Investments are not FDIC Insured. Investments are not deposits of the financial institution and are not guaranteed by the financial institution. Investments are subject to risks including loss of principal.