As a holiday present to America, Congress has finally come together to pass the SECURE Act, which includes some of the biggest changes to retirement law seen in decades. We are still processing this law, but here are some points to familiarize yourself with. If you believe any of these changes will impact you and you have questions, please contact your trusted tax advisor to discuss the consequences this law may have on your situation.
• RMD age is increasing from 70.5 to 72: The age for required minimum distributions is increasing, so if you were scheduled to take your first RMD in 2020 at 70.5, you can now hold off until the year you turn 72.
• Contribution age for IRAs increased if still working: The law has changed so that IRA contributions do not need to stop if you are above age 70.5 and you still have earned income. Before the SECURE Act, you could not make contributions above age 70.5, even if still working.
• 1,000 hour requirement for 401(k) participation has changed to 500 hours: The law change will allow those that have worked for 500 hours per year for the last 3 consecutive years to participate in a company’s 401(k) plan, as long as they are 21 years of age at the end of the period.
• Penalty-free withdrawals on birth or adoption of a child: You will be permitted to take out $5,000 penalty free from a 401(k) on the birth or adoption of a child. Each spouse is permitted the $5,000 withdrawal. This is meant to encourage younger people to contribute without fear of having access to the funds when they start a family. This can be done within the year of the child’s birth or adoption finalization.
• Lifetime income disclosure statements & options for receiving income: This provision is supposed to allow for more transparency into how your 401(k) savings will translate into income as you retire. Plan sponsors will also be permitted to offer annuities, which will allow for a more predictable income stream.
• Auto enrollment into 401(k) expanded: This provision will allow employers to set a default contribution rate for employees. Employees will have the option to lower, raise, or opt out all together, but the default will be enrollment in the plan to encourage retirement savings.
• Expansion of credit for start up costs for small businesses starting a 401(k) plan: Not all small businesses offer this benefit, and therefore incentives have been added to help support small businesses by offsetting their costs of starting up a retirement plan. The credit has been raised to $5,000 for the set up, and $500 extra for plans that include automatic enrollment. It is in addition to the credits for the set up of the plans.
• Grad school stipends or compensation for post-doctoral study or research now considered earned income: Those seeking higher degrees will now be able to count amounts received for study, research, fellowships, and stipends as income for purposes of making IRA contributions.
• Stretch IRAs eliminated for nonspouse beneficiaries of IRAs: Under the old rules, beneficiaries were able to take distributions from inherited IRAs over their expected lifetime. The rule has been changed that in general, this is restricted to 10 years. If the beneficiary is a minor, chronically ill, or not more than 10 years younger than the deceased, they can still use the stretch rules (although the minor needs to go with the 10 year rule once reaching age of majority)
• Banned usage of 401(k) loans loaded onto credit cards: Seen as a predatory practice, the SECURE Act bans loading 401(k) loans onto credit cards, which often resulted in the balance increasing to levels the account holder could not repay.
If you have any questions, don’t hesitate to call.