What does the new SECURE Act mean for you and your company?
After months of efforts by Congress, the Setting Every Community up for Retirement Enhancement (SECURE) Act of 2019 was signed into law on Dec. 20, 2019. The primary goals of the SECURE Act are to expand retirement savings, preserve retirement income, simplify existing rules, and improve qualified retirement plan administration.
Some of the more significant changes related to individual taxpayers include the following:
- Increase in age for the mandatory start date of required minimum distributions (RMDs) from age 70½ to age 72. Specifically, individuals participating in an ERISA-qualified, employer-sponsored retirement plan (e.g., a 401(k) plan) who are not greater than 5 percent shareholders or owners in the company sponsoring the plan, can continue to delay or postpone the commencement of their plan related RMDs until the latter of age 72 or separation from service, including up to as late as their required beginning date (RBD), which is April 1 of the year following the year in which they separated from service. This change is effective for individuals turning 70½ after Dec. 31, 2019 (i.e., anyone born after June 30, 1949). Individuals born June 30, 1949 or earlier will remain subject to the previous RBD age requirements of 70½. This means that clients born in the first half of 1949 were required to take their initial RMD in 2019 or by Apr. 1, 2020 if they elected to delay the initial RMD. Clients born before 1949 must continue to withdraw RMDs.
- Repeal of the maximum age for IRA contributions: The SECURE Act repeals the prohibition on contributions to a traditional IRA by an individual over age 70½. Taxpayers with earned income can now make traditional IRA contributions at any age, effective for contributions made for taxable years beginning after Dec. 31, 2019. This reflects the fact that many Americans are living longer and working into their later years.
- Modified required minimum distribution rules for non-spouse beneficiaries: The SECURE Act modifies the RMD rules with regard to non-spouse beneficiaries (e.g., siblings, children, and grandchildren) who inherit any IRA or employer-sponsored retirement plan assets upon the death of the account owner. Under the new law, distributions made to beneficiaries other than eligible designated beneficiaries (exempt beneficiaries) will be required to distribute account balances in their entirety by no later than Dec. 31 of the 10th year following the year in which the account owner died, eliminating the ability to “stretch” an IRA for those beneficiaries over their life expectancy. The following beneficiaries are “eligible designated beneficiaries” and are exempt from this new rule:
- Disabled beneficiaries (defined by IRC Section 72(m)(7));
- Chronically ill individuals (defined by IRC Section 7702B(c)(2));
- Individuals who are not greater than 10 years younger than the account owner; and
- Specific minor children of the original account owner who have not reached the age of majority (10-year rule starts upon minor child reaching age of majority).
Some of the more significant changes related to employers and 401(k) plans include the following:
- Increased tax credit for small businesses that establish a 401(k), 403(b), SEP IRA, or SIMPLE IRA;
- Tax credit for adoption of auto-enrollment of participants in 401(k) plans;
- Provision of ERISA fiduciary safe harbor for selecting an annuity provider for retirement plans and increased portability options for participants;
- Long-term, part-time employees who work at least 500 hours in at least three consecutive years will be eligible to participate in their employer’s 401(k) plan;
- Elimination of “one bad apple” rule for multiple employer plans (MEP) and elimination of “same industry” rule;
- Employers may adopt employer-funded retirement plans up to the due date of the employer’s tax return; and
- Increased penalties for employers failing to file taxpayer and employee benefit plan returns.
Some other notable changes include the following:
- Qualified education expenses for 529 plans expanded for student loans and apprenticeships; and
- Allowance of qualified disaster distributions up to $100,000 per disaster from retirement accounts.
Lauri Droster, CFP, MBA, is branch director at RBC Wealth Management and senior vice president of The Droster Team.
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