Late in 2019, Congress passed the “Setting Every Community Up for Retirement Enhancement” (SECURE) Act, the biggest retirement law in more than a decade. Most provisions in this new legislation went into effect on January 1, 2020. Following is a summary of ten key changes.
- Stretch IRAs: Generally, the new law favors taxpayers, but it does close a tax loophole that allowed non-spousal beneficiaries of IRAs and defined contribution plans like 401(k)s to “stretch” required minimum distributions (RMDs) over their life expectancies. Now funds must be distributed to non-spousal beneficiaries within ten years of the account owner’s death, unless an exception applies. The exceptions are for surviving spouses, disabled or chronically ill individuals, children who have not yet reached the age of majority and individuals not more than ten years younger than the account owner.
- RMD starting age: Previously, qualified plan and IRA participants had to start taking RMDs in the year after the year they turned age 70½. The SECURE Act pushes back the starting date to the year after the year in which you turn age 72.
- IRA contributions: The tax law had prohibited individuals from contributing to a traditional IRA after reaching age 70½. This age restriction has been removed.
- Plan start-up credits: Under prior law, a small business could claim a tax credit equal to 50% of the start-up costs of a qualified plan, up to a maximum of $500. The new law increases the credit under a new formula with a maximum of $5,000.
- Automatic enrollment credits: The new law also creates a brand-new credit of up to $500 per year for employers that automatically enroll 401(k) and SIMPLE participants. This credit is only available for a three-year period.
- Part-time workers: In the past, employers could exclude part-time workers working fewer than 1,000 hours per year from participating in their 401(k) plans. But the new law opens up plans to employees who have completed three consecutive years of at least 500 hours of service.
- Annuity options: The new law requires 401(k) plan administrators to provide annual disclosure statements reflecting annuity options. In addition, participants who purchase annuities will have more flexibility, including portability between plans.
- Early withdrawal penalty: Certain types of plan distributions are exempt from the usual 10% tax penalty on early withdrawals prior to age 59½. The SECURE Act adds to the list by allowing penalty-free distributions for up to $5,000 of qualified birth and adoption expenses.
- Fellowships and stipends: In the past, non-tuition fellowships and stipends received by graduate and postdoctoral students generally could not be used to fund IRA contributions. Now these amounts may be used for IRA funding.
- 401(k) safe harbor rules: Finally, the new law includes various changes designed to enhance employee protections and encourage use of 401(k) plans. See a benefits specialist for more details.
Of course, this is only a brief overview. There is much more to this new law than first meets the eye. Stay tuned: In upcoming issues, we will feature ways to maximize the benefits of the SECURE Act and avoid major pitfalls. Call us and let’s discuss what might work for you.