February 13, 2020
Displaying Washington’s penchant for creating legislation that fits into nifty acronyms, the bipartisan Setting Every Community Up for Retirement Enhancement Act was signed into law on December 20. Better known as the SECURE Act, it was primarily designed to address America’s retirement savings problem and make it easier for families to access and save for retirement. But with 30 provisions that usher in the most significant changes to retirement accounts since 2006, there’s more in there to help students and other specific groups.
For those who were preoccupied with the chaos of the holiday season, we’ll break down the major components of the act and who looks to benefit, or not, from the changes.
The SECURE Act pushes back the start date of required minimum distributions (RMDs) from your IRA or 401(k). It’s gone from April 1 following age 70½ to April 1 following age 72. Therefore, if you were born on July 1, 1949, or later, you do not have to take an RMD until age 72. You’ll be able to benefit from an additional year and a half of tax-deferred growth. If you were born before then, however, you remain under the old RMD rules and need to start withdrawing from your account at age 70½. IRA owners can still make qualified charitable distributions (QCDs) as early as age 70½.
Removing the contribution age limit
Another positive change is the removal of the 70½ age limitation on traditional IRA contributions. Like Roth IRAs, you can only contribute if you have earned income in that year. But as people delay retirement, it means more time to set aside tax-deferred earnings (if you fit within income thresholds).
Before the SECURE Act, inheritors of a 401(k) or an IRA were generally allowed to take RMDs over the course of their life expectancy, often called stretch RMDs. Now for account owners who die in 2020 or after, their beneficiaries (in most cases) are required to withdraw account balances within 10 years of the account holder’s death. During this 10-year period, no annual distributions are required, but all funds must be withdrawn from the account by the end of the 10th year.
Shortening the potential distribution period may result in greater tax burdens for some beneficiaries of traditional IRAs or 401(k)s. Those who inherit large accounts could be pushed into higher tax brackets as they are unable to stretch withdrawals over the course of their lifetime. It’s important for retirement account owners to review their beneficiary designations, and if need be, consult tax or estate planning professionals for more guidance.
There are a few exceptions to the new RMD rule: the surviving spouse or minor child (until they reach the age of majority) of the account owner, disabled or chronically ill people, and individuals who are not more than 10 years younger than the account owner. These people are grandfathered under the old RMD rules and, therefore, have more options when it comes to withdrawals.
The act provides several incentives for small businesses to offer retirement plans for employees.
Bigger tax credit for establishing a retirement plan
Small businesses, defined as companies with 100 or fewer employees receiving $500 or more of compensation per year, can now receive a bigger tax credit for establishing employer-sponsored retirement plans. Under the old rules, employers were eligible for a credit up to $500 for up to three years for startup costs related to employer-sponsored retirement plans. The SECURE Act significantly increases this credit, allowing small businesses to receive a maximum credit $5,000 for up to three years.
In addition, the SECURE Act makes it easier for small businesses to group together and establish multi-employer 401(k)s.
Credit for auto-enrollment
Small businesses are also eligible for an additional $500 credit for adopting an auto-enrollment feature on their employer-sponsored 401(k) or SIMPLE IRA plans. The credit applies for up to three years and is also available to employers that add the auto-enrollment feature to their existing plans.
A couple of provisions, while applicable to anyone, will particularly help many women save more for retirement.
Expanding 401 (k) access to part-time workers
Before the SECURE Act, part-time workers have been plagued by the 1,000-hour rule. This rule allows employers to exclude employees who work less than 1,000 hours per year from their workplace retirement plan. Historically, this has particularly hurt women who are more likely than men to hold part-time jobs, especially when caring for their family. The SECURE Act now allows long-standing part-time employees the opportunity to participate in their employer’s retirement plan. Under the new law, employees who work 1,000 hours a year or 500 hours in three consecutive years can’t be excluded from their employer’s retirement plan.
Retirement savings for home health care workers
Nearly 9 out of 10 home health care workers are women, and almost half of industry workers are between the ages of 45 and 64, according to PHI National. Yet, under the tax code, many home health care workers’ income was tax exempt, therefore they could not contribute to an IRA or company defined benefit (pension) plan. The SECURE Act amends the tax code to now allow home health care workers to contribute to these plans and save for their retirement.
Expansion of 529 plans
In 2018, the Tax Cuts and Job Act broadened the use of 529 plans to allow $10,000 a year for K-12 tuition. The SECURE Act further expands 529s by allowing plan dollars to be used for qualified expenses for apprenticeship programs that are registered and certified with the Department of Labor; homeschooling; and private elementary, secondary and religious schools.
In addition, students can use up to $10,000 (lifetime per person) for qualified education loan repayments. This change is effective retroactively to the beginning of 2019.
Stipends/fellowships count for IRAs
Graduate and postdoctoral students can now include stipends and non-tuition fellowship payments as income for IRA contribution purposes, helping these students save for retirement.
Qualified distribution for birth or adoption
The legislation provides a new exception to the 10% early distribution penalty for a qualified birth or adoption. An account owner can withdraw $5,000 penalty-free at any point during the one-year period beginning on either the date of birth or the date the adoption is finalized. Income taxes will still be owed on traditional 401(k) or IRA distributions, though.
Kiddie Tax reversion
Under the Tax Cuts and Jobs Act, unearned income of children was taxed at higher trust tax rates which had been resulting in higher overall taxes for many. The SECURE Act reverts the rules back to before the tax act, which means a child’s unearned income is taxed at their parent’s marginal tax bracket and not trust tax rates.
With more provisions that apply to community newspapers, church-controlled organizations, tax-filing penalties and more, the SECURE Act brings quite a lot of changes that go beyond the retirement landscape — and for the most part they are positive. We recommend seeking professional financial guidance if you have specific questions regarding how the act applies to you.
Want the latest wealth management tips, investment insights and Aspiriant news delivered straight to your inbox. Sign up for regular Fathom updates so we can send you the most relevant content you selected below.