The Setting Every Community Up for Retirement Enhancement (SECURE) Act was grafted onto a government spending agreement in December, and it took effect on January 1 of this year. The new legislation provides several enhancements and tax benefits for more retirement savings.
Incentives for individuals:
The old rule was that contributions to a traditional IRA were prohibited to anyone older than age 70½. The new law removes the ban on contributions by the oldest Americans entirely. However, one still must have earned income to be able make a contribution to an IRA, investment income is not eligible.
Another age-related factor was the requirement for minimum distributions from IRAs to begin at age 70½. In recognition of the improving lifespans of our retired population, and to permit a longer period of asset growth, the age for required distributions has been boosted to 72. This new rule applies to those born on or after July 1, 1949. Those born before that date must comply with the old law, because they turned 70½ in 2019.
An individual may have a greater incentive to invest in IRAs for the longer time period of tax-deferred growth.
Incentives related to unusual expenses:
The SECURE Act allows for a penalty-free withdrawal from retirement accounts of up to $5,000 for the expenses of a qualified birth or adoption. It also permits up to $10,000 to be transferred from a 529 plan to pay down a student loan. The $10,000 is a lifetime, per-student limit, not an annual limit. Apprenticeship programs are now eligible expenses for 529 plans.
These liberalizations to the withdrawal rules are intended to encourage younger workers to save more money earlier in their careers, reducing the fear of “locking up” their savings.
Incentives for businesses:
More people will be able to participate in company retirement plans now. The old law permitted plan participation for those working more than 1,000 hours annually for an employer. The new law keeps the 1,000-hour rule and extends eligibility to anyone who works at least 500 hours for an employer for three consecutive years.
New tax credits are available for small businesses (fewer than 100 employees) that start a retirement plan. A credit of $250 per non-highly compensated employee could motivate some employers to act. The credit is capped at $5,000.
Many people entering retirement would prefer the certainty of a pension that lasts a lifetime to the worries of investing a lump sum distribution and determining suitable annual payouts. The new law makes it easier for employers to offer lifetime income choices in addition to the lump sums now available.
The limit for auto enrollment contributions is lifted from 10% to 15%.
These additional choices could make it more appealing for employers to provide a retirement incentive for employees and to encourage them to participate in the plan.
How will we pay for the incentives?
All of these changes are scored as losing federal tax revenue, even though they are really a temporary deferment of tax, not a tax forgiveness. When taxes go down for one group, Congress will typically raise them for another group, in a quest for “revenue neutrality.” The chosen group for higher taxes in this case are the heirs, those who inherit the leftover balances in IRAs and qualified plans.
Heirs have always had required minimum distributions from their inherited IRAs, just as the account owners have. Before the SECURE Act, the heirs were generally allowed to spread those distributions over their lifetime. Now the distributions must occur within ten years following the account owner’s death. That means a shorter period of time for account growth, and in many cases the heir will be in a higher tax bracket when the money is received.
There are five exceptions to this new rule. The following “eligible beneficiaries” may use their lifetimes to calculate required minimum distributions, rather than accelerate distributions over ten years.
- Surviving spouses
- Minor children (ten-year rule begins at age of majority)
- Disabled persons
- Chronically ill persons
- Persons who are less than ten years younger than the account owner.
How widespread was the use of “stretch IRAs” by heirs? According to the Congressional Budget Office, this single change will increase federal tax revenue by some $15 billion over the next ten years.
Does the SECURE Act make me more financially secure?
Saving as much as possible for retirement is important for everyone, and the passage of the SECURE Act is a good reminder of that fact. The new rules increase the relative attractiveness of Roth IRAs and Roth 401(k)s, because payouts from them are potentially tax free to account owners and their heirs alike.
You are still responsible for creating your own financial security for retirement, and Social Security is only a supplemental program. Hopefully, the SECURE Act’s incentives will succeed in encouraging more savings by individuals and creation of plans by businesses. It is that savings that will make you more financially secure, and time can be an important ally to grow those savings.
A good starting place is to speak with an advisor, such as the Arvest Wealth Management Client Advisors located at a nearby Arvest Bank , who can help inventory your assets, liabilities, earnings, and goals to help determine what would be appropriate for your unique situation.
Find an Arvest Client Advisor by entering in your location on this page.
If you have an IRA in your estate plan or have recently inherited an IRA, it may be a wise idea to consult an estate planning professional, such as an Arvest Trust Officer, to discuss whether your planning should be adjusted, given the passage of the SECURE Act.
This content has been provided by Merrill Anderson and is intended to serve as a general guideline.
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