Here’s What the SECURE Act Means for Your Retirement and Estate Planning
Learn All You Need to Know About these Sweeping New Provisions.
With so much focus on the economic volatility and stimulus packages stemming from the COVID-19 pandemic, many people have overlooked a piece of far-reaching new legislation signed into law in late 2019 meant to alleviate America’s retirement savings crisis. Called the Setting Every Community Up for Retirement (SECURE) Act, it took effect on January 1, 2020, and there are significant provisions that may impact your retirement planning.
Here are a few SECURE Act changes to know.
Elimination of the ‘Stretch’ IRA
If you haven’t heard the term ‘stretch’ IRA, it refers to a past strategy commonly used by younger beneficiaries of IRAs to stretch distributions out over their whole lifetimes. This allowed for payments over a longer period of time, and it offered a way for beneficiaries to stretch out their income tax burdens over time, too. With this provision eliminated, the SECURE Act now requires that most beneficiaries withdraw the full balance of an inherited account within a decade of inheritance. It is effective for deaths occurring after December 31, 2019. Anyone who inherited such an IRA prior to that time will not be required to meet this ten-year rule.
Of note, the SECURE Act does provide a few exemptions for this provision. The following individuals may still ‘stretch’ their RMDs:
- Surviving spouses
- Children under 18
- Chronically ill individuals
- Disabled individuals
- Those who are no more than ten years younger than the account owner
If stretch RMDs represented an important aspect of your estate planning, you may be able to accomplish your goals through the use of a charitable remainder trust (CRT) instead. A CRT can provide an income stream for a specified number of years, or until the beneficiaries’ deaths.
No Age Cut-Off for IRA Contributions
Prior to the SECURE Act, you were prohibited from contributing to a traditional IRA in the year you reached age 70 ½, even if you were still drawing a paycheck. With this rule now eliminated, anyone can make IRA contributions as long as they have earned income to contribute, regardless of age. This change lines up traditional IRA rules with the contribution rules for Roth IRAs and 401(k) plans.
The increased contribution period is in effect for the 2020 tax year. While 2019 contributions can be made until April 15, 2020, they must still follow the past rules, whereby only those under the age of 70 ½ can contribute for the tax year 2019.
Delayed Required Minimum Distributions
This change is good news for many. The SECURE Act eased the required minimum distribution (RMD) rules for traditional IRAs and other qualified plans. In the past, you were required to begin taking RMDs – and paying taxes on them – at age 70 ½, but the SECURE Act raised the age to 72. It applies to anyone who was not yet 70 ½ as of December 31, 2019. Subsequent to this, however, the President signed the CARES Act into law in March 2020, and it effectively suspended all RMDs for the tax year 2020 as people try to recover from the financial effects of the COVID-19 pandemic.
Note: If you’ve been using qualified charitable distributions (QCDs) as a way to satisfy your RMD requirement while contributing to charity, you may continue to do so under the SECURE Act even though the RMD age has increased to 72.
Part-Time Worker Plan Eligibility
Another meaningful SECURE Act change benefits part-time employees. Those who worked more than 500 hours a year for three consecutive years must be permitted to participate in their employer’s 401(k) plan. Employers must also grant access to part-time employees who worked 1,000 hours or more during the past year.
Lower Barriers for MEPs
It is now easier for small businesses to offer multiple employer plans (MEPs), where small firms join together to offer a retirement plan through a shared plan administrator. This lowers costs and administrative duties for participating businesses, making it an attractive option. The SECURE Act loosened rules requiring participating businesses to be similar (i.e. in the same industry) so that it’s easier for unrelated businesses to form MEPs for their employees. This means greater access to retirement plans for many employees.
As you can see, some of the SECURE Act’s changes could impact your retirement and estate planning in meaningful ways. If you’d like more information about how the above provisions may affect you, let’s start a conversation today in order to ensure you can still meet your retirement and estate planning goals.