By: Matt Parks | mparks@deandortonwealth.com
The SECURE (Setting Every Community Up for Retirement Enhancement) Act, recently passed, includes significant retirement savings changes for individuals and for businesses sponsoring retirement plans. This article highlights and summarizes some of the Act’s key provisions.
Opportunity to Defer Starting Retirement Distributions Until Age 72
Prior to the Act, most individuals were required to begin taking minimum distributions (called “RMDs”) from their IRAs and qualified employer plans for the year they turned 70 ½. The SECURE Act now allows you to wait until age 72 to begin taking RMDs, provided you turn age 70 ½ after 2019. For those not yet needing to draw upon their IRAs and qualified plan monies, this change provides additional time for account balances to grow tax-deferred. For those who had already reached age 70 ½ by December 31, 2019, the old rules still apply.
The Elimination of “Stretch” IRAs
Under prior law, a non-spouse IRA beneficiary was permitted to use that individual’s own life expectancy when calculating RMDs on an inherited IRA. Since most IRA beneficiaries are younger than the original account owner, this enabled beneficiaries to “stretch” the RMDs out over a longer period (sometimes a much longer period), allowing them to capture additional tax-deferred benefits. The new law requires that most inherited IRAs for non-spouse beneficiaries be distributed within 10 years of the original IRA owner’s death. Exceptions to this new rule apply to disabled or chronically ill beneficiaries, beneficiaries fewer than 10 years younger than the decedent, and children of the decedent under age 18 (once they reach age 18, the new 10-year provision applies).
To minimize the impact of this change, it will be important for non-spouse beneficiaries to time the distributions during the new 10-year payout period in a way that minimizes their overall income tax consequences. The law does not provide a set schedule for distributions; it simply states that the account must be fully distributed by the end of the tenth year.
Increased Savings Opportunities for Older Workers
Until the Act’s passage, a working individual over age 70 ½ was not eligible to contribute to a traditional IRA even if he had earned income. The new law now allows contributions to be made to a traditional IRA up to the maximum IRA limit (or the earned income level, if less) for as long as the individual is still working. For individuals attempting to maximize retirement savings in the latter part of their working years, this affords an opportunity to continue making use of a tax-deferred arrangement.
Retirement Benefits for Part-Time Workers
Under old law, a part-time employee was usually excluded from participation in her employer’s 401(k) retirement plan unless she worked more than 1,000 hours per year. The SECURE Act reduces the annual threshold to 500 hours, provided the employee works that much for three consecutive years. Thus, as long as the individual will be age 21 by the end of those three years and works more than 500 hours per year, she will be eligible to participate in the employer’s 401(k) plan and make elective contributions to the plan. (The law does not require that these part-time employees receive employer matching contributions, but an employer may choose to include them when making such contributions).
New Tax Credits for Employers
For some time now, a small business has been able to take advantage of a $500 tax credit for the first three years it has a 401(k) plan. The SECURE Act increases this amount to as much as $5,000, depending on how many non-highly compensated employees are eligible to participate in the plan. Additionally, the new law creates a new credit of up to $500 per year for employers who establish a 401(k) plan that includes an automatic enrollment feature. Thus, the tax credit for offering a new 401(k) plan can now be as high as $5,500 per year, for up to three years.
New Pooled Employer Plans for Small Businesses
The cost of sponsoring a 401(k) plan has often been a financial challenge for smaller companies which want to offer competitive benefits to their employees. The SECURE Act establishes Pooled Employer Plans (PEPs), a type of Multiple Employer Plan that any employer can join. Because the costs of administering the plan are spread among several employers, the financial hurdle should be easier to overcome. In addition, concerns about compliance and regulatory burdens are handled by outsourcing fiduciary responsibility to the Pooled Plan Provider. The goal is to make the 401(k) plan a more common benefit at small businesses which may have previously opted for a SIMPLE IRA with lower contribution limits.
Dean Dorton’s tax advisors or Dean Dorton Wealth Management’s wealth advisors would be pleased to assist you in understanding and applying these new provisions in a way that is most advantageous for you. Feel free to reach out to your primary contact at Dean Dorton, or contact David Parks of Dean Dorton Wealth Management at 859.425.7782 or dparks@deandortonwealth.com.