Who is Feeling SECURE with the New Tax Change for Retirement Accounts?
The nine most terrifying words in the English language are “I'm from the government, and I'm here to help.” Ronald Reagan famously stated this. So, it’s understandable that some may be apprehensive when the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 was signed into law.
The most sweeping legislative tax or retirement reform in over a decade became active on January 1st, 2020. For some, it may help prepare for retirement. But for others, it may not have a positive impact at all. Those who will be hurt the most are likely those who don’t understand the new changes and how to adjust. As with any change, The SECURE Act may reveal new opportunities with a new retirement strategy.
While there are many parts to the changes, here is a briefing on the 3 main provisions to The SECURE Act that you must be aware of immediately. Important to those in retirement or facing retirement will be how the first two impact the tax burden for themselves and their loved ones over the years.
Limits on Stretch IRAs
The legislation “modifies” the required minimum distribution rules in regard to defined contribution plans and Individual Retirement Account (IRA) balances upon the death of the account owner. Under the new rules, distributions to non-spouse beneficiaries are generally required to be distributed by the end of the 10th calendar year following the year of the account owner’s death.
It’s important to highlight that the new rule does not require the non-spouse beneficiary to take withdrawals during the 10-year period. But all the money must be withdrawn by the end of the 10th calendar year following the inheritance.
A surviving spouse of the IRA owner, disabled or chronically ill individuals, individuals who are not more than 10 years younger than the IRA owner, and children of the IRA owner who have not reached the age of majority may have other minimum distribution requirements.
Let’s say that a person has a hypothetical $1 million IRA. Under the new law, your non-spouse beneficiary may want to consider taking at least $100,000 a year for 10 years regardless of their age. For example, say you are leaving your IRA to a 50-year-old child. They must take all the money from the IRA by the time they reach age 61. Prior to the rule change, a 50-year-old child could “stretch” the money over their expected lifetime, or roughly 30 more years.
IRA Contributions and Distributions
Another major change is the removal of the age limit for traditional IRA contributions. Before the SECURE Act, you were required to stop making contributions at age 70½, even if you were still working. Now, you can continue to make contributions as long as you meet the earned-income requirement.
Also, as part of the Act, you are allowed to begin taking required minimum distributions (RMDs) from a traditional IRA later than the previous required age of 70½. Allowing money to remain in a tax-deferred account for the additional months (before needing to take an RMD) may alter some previous projections of your retirement income.
Please see updates below, regarding new Secure Act 2.0 RMD ages.
Multiple Employer Retirement Plans for Small Business
In terms of wide-ranging potential, the SECURE Act may offer its biggest change in the realm of multi-employer retirement plans. Previously, multiple employer plans were only open to employers within the same field or sharing some other “common characteristics.” Now, small businesses have the opportunity to buy into larger plans alongside other small businesses, without the prior limitations. This opens small businesses to a much wider field of options.
Another big change for small business employer plans comes for part-time employees. Before the SECURE Act, these retirement plans were not offered to employees who worked fewer than 1,000 hours in a year. Now, the door is open for employees who have either worked 1,000 hours in the space of one full year or to those who have worked at least 500 hours per year for three consecutive years.
Updates as of 2023: The SECURE Act 2.0
In light of the SECURE Act 2.0, some of the original provisions of the SECURE Act have undergone changes, particularly concerning Required Minimum Distributions (RMDs) and Roth accounts. Here are the updates:
Changes in Required Minimum Distributions (RMDs)
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RMD Age: The age to begin taking RMDs will increase to 73 in 2023, with a further increase to 75 by 2033. This extends the opportunity for tax-deferred growth in retirement accounts, but it also necessitates recalibrating retirement income projections.
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Penalty Reduction: The penalty for failing to take an RMD has been decreased to 25% of the RMD amount, down from 50%. Additionally, for IRAs, the penalty will be 10% if corrected in a timely manner. This reduced penalty allows for more leniency in case of oversight.
Roth Accounts in Employer Plans
Starting in 2024, RMDs will no longer be required from Roth accounts in employer retirement plans. This change could impact your long-term tax planning and asset distribution strategy.
Catch-up Contributions
Catch-up contributions for 401(k), 403(b), governmental plans, and IRAs will increase in 2025. This provides an additional avenue to boost retirement savings, especially for those nearing retirement age.
Emergency Savings Account
Defined contribution plans will now have the option to add an associated emergency savings account with a Roth feature. This addition allows for more financial flexibility during retirement.
Strategy Makes the Difference
The SECURE Act was rushed to pass before 2019 year-end, with bipartisan support in an effort to improve retirement security. While it was implemented with great intentions, and a very catchy name, it still remains the responsibility of each individual to prepare – and strategize – to make the most of their retirement accounts. With such sweeping changes, retirees should understand how this may affect their current plan and long-term tax burden. Seeking the help of a financial planner with tax expertise may make a difference between shouldering unexpected tax liabilities and an actual SECURE retirement!
Krista McBeath is an Investment Advisor, Chartered Financial Consultant, a Licensed Insurance Advisor, a Fiduciary, and an experienced tax advisor who specializes in financial planning, investments, and insurance. She utilizes advanced tools for in-depth calculations that analyze tax and retirement scenarios to help her clients avoid a future tax time-bomb. Whether this means enjoying more of your hard-earned money in retirement or passing along assets to loved ones with less tax burden, planning makes the difference.
Her Amazon best-selling book, The Generational Wealth System outlines a holistic approach to preserving lifestyle, wealth and legacy.
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Citations.
waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SECURE%20Act%20section%20by%20section.pdf [12/25/19]
