The SECURE Act – Improving the Security of Your Retirement

Thanks to new legislation, the security of your retirement has improved and is stronger than ever before.

The SECURE Act in a Nutshell:

• The previous maximum age requirement to participate in IRA contributions has been removed;
• The required minimum distribution age (RMD age) has increased from 70.5 to 72.
• Part-term workers are now eligible to participate in a 401(k) plan, provided they are a long-term worker;
• The range of lifetime income strategies available has increased;
• Parents now have the ability to withdraw as much as $5,000 from their retirement funds, without penalty, to cover certain expenses within a year of the birth or adoption of a child;
• Parents also have the ability to withdraw as much as $10,000 from their 529 scheme to put towards student loan repayments.

On 20 December 2019, Congress signed a large package of government spending into law. These provisions largely came into effect on 1 January 2020. Part of this package included the SECURE Act – an acronym for Setting Every Community Up for Retirement Enhancement. The SECURE Act aims to ensure that retirement savings are more accessible and easier to navigate for everyday Americans.

The Legislation Particularly Affects Regulated Contribution Plans, Including –

• 529 college accounts
• IRAs (Individual Retirement Accounts)
• Defined benefit pension plans
• 401(k)s.

The Most Important Elements Of The SECURE Act Are As Follows –

• Required Minimum Distribution Age (RMD Age) increased from 70.5 To 72.
• Because Americans are now working longer, there will be no requirement for them to withdraw assets from 401(k)s and IRAs when they turn 70½.
• Any person who turned 70½ in the 2020 calendar year will have their RMD begin at age 72.
• If you’ve already started taking your RMD because you turned 70½ in 2019, you should continue taking your RMDs. We suggest speaking with a qualified tax professional regarding future distributions.

What To Do Next

Consider speaking with a financial advisor about your RMD withdrawal plans if you reached the age of 70.5 years in 2020.

Maximum Age Requirement To Participate In IRA Contributions Has Been Removed

• Americans are living longer and an increasing number are choosing to continue working past the traditional retirement age.
• The Act allows for people who are still working past age 70½ to continue contributing to their traditional IRA. This means that the rules for traditional IRAs, 401(k) plans, and Roth IRAs, are much more closely aligned.

What To Do Next

These changes come into effect for contributions made in 2020 but do not include 2019 contributions. Consider speaking with a financial advisor about your expected age to withdraw your retirement savings based on how long you intend to work and how ready you feel for retirement.

The deadline to make IRA and HSA contributions and file and pay federal income taxes for 2020 was extended to 17 May 2021 for most of the country, and to 15 Jun 2021 in Texas, Oklahoma, and Louisiana. Contributions for IRA and HSA contributions for previous years can be made until 11.59 pm on Tax Day, while contributions made between 1 January and 17 May can be included in a prior year or in the current year.

Part-Term Workers Eligible To Participate In A 401(K) Plan, Provided They Are Long-Term

• Until this change in law, people who worked less than 1,000 hours per annum were typically not eligible to participate in their company’s 401(k) plan.
• With the exception of collectively bargained plans, the law now states that employers who maintain a 401(k) plan must include employees who were employed for more than 1,000 hours over a one year period or who were employed for 500 hours over a period of three consecutive years.

What To Do Next

If you’re an employee who works part-time and have been ineligible in the past to participate in your company’s 401(k) plan, speak to your HR department about how and when you can enrol.

Beneficiaries Of Retirement IRA Accounts Must Take Their Distribution Within 10 Years

• In the past, anyone who inherited a 401(k) or IRA could ‘stretch’ the distributions and tax payments over their single life expectancy. It was common practice for people to use their ‘stretched’ 401(k)s and IRAs as dependable income sources.
• Today, however, if you have inherited an IRA from an original owner who died on or after January 1, 2020, the law requires that assets inherited from a 401(k) plan or IRA should be withdrawn by beneficiaries within 10-years of the passing of the account holder.
• Assets inherited by a surviving spouse, a minor child, a chronically ill or disabled beneficially, and beneficiaries less than 10-years younger than the original 401(k) or IRA account owner, are exceptions to the 10-year rule.

What To Do Next

You may wish to consider re-evaluating your estate and retirement planning strategies if you planned to leave your IRA to beneficiaries based on previous laws. We suggest you discuss this matter with your estate planning attorney or tax professional. No changes are required if you’re a beneficiary of an inherited 401(k) or IRA and the original owner of the account died prior to January 1, 2020.

The Owners Of A Small Business Can Received Up To $5,000 As A Tax Credit After Starting A Retirement Plan 

• The new law provides for a start-up retirement plan credit for small business employers in the amount of $250 for each non-highly compensated employee entitled to take part in a workplace retirement plan ($500 minimum credit and $5,000 maximum credit)
• The credit applies to 401(k), SIMPLE, SEP, and profit-sharing plans with small-business employers who have up to 100 employees over a three-year period, beginning after 31 December 2019.
• $500 in additional credit is now available if the retirement plan includes automatic enrollment.

What To Do Next

Any small business owner that has not yet created an employees retirement plan should establish a retirement plan and take advantage of the new credit laws.

The Owners Of Small Businesses Can Now Work Together To Create Contribution Retirement Plans

• The law enables the adoption of MEPs (Multiple Employer Plans) by permitting unrelated employers to take part in an MEP. This abolishes the IRS’s “one bad apple” rule which states that all employers taking part in an MEP could potentially face negative tax consequences if one employer does not conform to the tax qualification rules for the MEP.
• The law facilitates the adoption of open multiple employer plans (MEPs) by allowing completely unrelated employers to participate in an MEP, thus eliminating the IRS’s “one bad apple” rule, which stipulates that all employers participating in an MEP may face adverse tax consequences if one employer fails to satisfy the tax qualification rules for the MEP.
• Around 50% of private-sector employees in the United States still have no access to a retirement plan through their employer. Open MEPs would provide high-quality, low-cost retirement plans for millions of small business employees.

What To Do Next

Any small business owner that has not yet created a retirement plan, or perhaps needs to make alterations to an existing plan to allow for easier execution, should take advantage of this new law and join a multiple employer plan. This will be available in 2021. If you’re a small business employee with an employer who is unable to offer a plan, we suggest advising your employer of this new opportunity.

Parents Can Withdraw As Much As $5,000 From Retirement Funds Without Penalty To Cover Certain Expenses Within A Year Of The Birth Or Adoption Of A Child

• The law allows for an individual to take a ‘qualified birth or adoption distribution’ of an amount up to $5,000 from a 401(k), IRA, or other defined contribution plan.
• There will be no 10% early withdrawal penalty for these funds. In addition, repayments can be made as a rollover contribution to an IRA or other eligible contribution plan.

What To Do Next

If you don’t have sufficient savings to fund the adoption or birth of a child, we suggest you consider taking advantage of this provision.

Parents Can Withdraw As Much As $10,000 From 529 Scheme To Put Towards Student Loan Repayments

• There are many cases where families have excess money sitting in their college savings plans once their student has graduated. They can now use a 529 savings account to pay an amount of up to $10,000 to cover student debt over the lifetime of the student.
• The new law allows for the utilization of a 529 plan for funding a range of apprenticeship programs.

What To Do Next

If there’s money left over in your family’s 529 plan after paying for college expenses, we suggest using the remaining funds to pay off student loans.

The SECURE Act Offers Other Benefits For Workplace Retirement Contributions

• Retirement savings are encouraged because the cap for auto-enrolment contributions in employer-sponsored retirement plans has increased from 10% of pay to 15%. Therefore, if your workplace plan provides auto-enrolment, the amount of money being withheld for your retirement savings could increase each year until such time as you’re contributing 15% of your pay to your retirement savings plan.
• It allows for ‘lifetime income investment’ to be dispersed from your workplace retirement plan. These income options would be portable, meaning that if you were to leave your job, your lifetime income investment could be rolled over to another IRA or 401(k).
• ‘Lifetime Income Disclosure’ statements provide increased transparency into retirement income. The statements indicate the amount of money you might potentially receive every month if the total balance of your 401(k) was used to purchase an annuity. This gives both you and your financial professional the information needed to gauge your potential income throughout retirement.