On December 20, 2019, the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act was signed into law effective January 1, 2020. This legislation brought about many significant and sweeping changes to our tax and retirement laws.
The four primary takeaways and planning opportunities that may affect you are as follows:
1. The required minimum distribution age for individual retirement accounts (IRAs) was changed from 70 ½ to 72. Therefore, if you did not reach age 70 ½ by December 31, 2019, your required minimum distributions do not begin until you reach age 72.
Planning opportunity: This change allows for continued tax-deferred growth of your IRA and may necessitate an evaluation of the timing of your distributions with your advisor.
2. Required minimum distributions can no longer be stretched for inherited IRAs over the life expectancy of the beneficiary, except in limited circumstances.
Planning opportunity: Review your IRA beneficiary designations and estate planning documents with your financial advisor and estate planning attorney to ensure that your IRAs will be inherited and distributed in the most tax efficient and asset protected manner under the new law.
3. IRA owners can contribute to their IRAs after age 70 ½ provided the participant is continuing to work and earn income. Prior to the enactment of the SECURE Act, you were not permitted to make contributions once you reached age 70 ½.
Planning opportunity: Meet with your financial advisor to discuss retirement readiness and how long you should work to meet your retirement goals.
4. Small businesses are eligible for a tax credit of up to $5,000 for 3 years ($15,000) for establishing a retirement plan and an additional tax credit of $500 for 3 years ($1,500) if the business adds an auto-enrollment feature to its retirement plan. Prior law capped the retirement plan establishment credit at $500 per year for 3 years, and it did not include the tax credit for adding an auto-enrollment feature to the retirement plan.
Planning opportunity: If you are a small business owner, you should meet with your financial advisor to discuss the benefits for yourself and your employees of starting a retirement plan, including increased employee retention and creating a nest egg for you.
In addition to the opportunities above, the SECURE Act also provides for penalty free withdrawals of up to $5,000 from IRAs for the birth or adoption of a child, long term, part-time employees can now qualify to participate in a 401(K), increased opportunities for lifetime income planning inside of qualified retirement plans, student loan debt repayment using 529 funds, and it increases the safety of lower cost retirement planning for small business owners through the addition of protections inside of Multiple Employer Retirement Plans.
Legislation of this magnitude historically comes along only once or twice a decade, and it provides both opportunities and challenges for individuals and small business owners. Therefore, we would encourage you to sit down with your financial advisor and estate planning attorney to determine the opportunities it presents for you to increase your financial fitness and retirement readiness.