The SECURE Act (Setting Every Community Up for Retirement Enhancement) was signed in to law late December 2019 and went in to effect almost immediately on January 1, 2020. The Act is wide-ranging in its effects and the overall goal was to improve access to employer-sponsored retirement plans, increase savings, and provide access to new investments. But there were some other provisions that came along for the ride that are not necessarily beneficial to investors.
Here are some of the positive changes:
1. The Act increased the age that Required Minimum Distributions have to start from 70.5 to 72. This doesn’t necessarily mean that much to too many people because most individuals have started dipping in to their IRAs well before age 70.
2. Removed the age limit for IRA contributions. This simply allows people who are still working past the age of 70.5 to continue to make tax-deductible contributions to their IRAs if they so choose.
3. Expansion of Multiple Employer Plans (MEPs). This allows unrelated employers to join together to create retirement plans administered by a third party. MEPs allow smaller employers to benefit from economies of scale and strengthen their negotiating power with plan providers. The end result is that smaller employers should have better access to providing retirement plans to their employees that before had been too costly.
4. The Act provides incentives to small employers to offer retirement plans. Companies with less than 100 employees can receive a 50% tax credit for retirement plan start-up costs and can also receive a credit of up to $500 per year for three years for including automatic enrollment in their plans.
5. Withdraws of up to $5,000 from IRAs or employer sponsored plans can now avoid the 10% early withdraw penalty if used to pay for costs associated with the birth or adoption of a child.
As I mentioned, there were a few provisions that I don’t view as necessarily positive to investors.
1. The biggest change is also one of the most complex. The short explanation is that balances of inherited IRAs and inherited defined contribution plan accounts are required to be distributed by the end of the tenth year after the IRA owner or plan participant dies, with exceptions for certain types of beneficiaries. These exempted beneficiaries include spouses and minor children. Prior to The Act, these non-exempted beneficiaries were generally allowed to stretch out distributions from the inherited account over their lifetime. This was referred to as the Stretch Provision. Now those distributions have been condensed to ten years, which can cause significant increases in taxable income, thus also increasing taxes owed to the government.
2. The Act now allows employer sponsored plans to offer annuities inside the plans. This can be viewed as both a good and bad development. The downside is that annuities are often complicated and expensive. That being said, investors can often provide some comfort and stability of a steady income stream by converting a small portion of their account balance to an annuity product.
These are a few of the bigger changes that I see impacting investors and employer. Outside of the elimination of the Stretch IRA provision, most of the changes are for the positive. If you have additional questions regarding how the Act might impact you, please feel free to connect with us.