The SECURE Act—Not All Bad News for Retirement Plans

While most investors had their focus on the holiday season, Congress was busy passing a spending bill to fund the government through the end of fiscal year 2020. Tucked in that was the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which is described as the biggest piece of legislation to affect retirement accounts since 2006. Most of the provisions in the SECURE Act are beneficial to investors. Let’s take a look at some of the significant changes.

Beginning this year, the law eliminates the age limit for traditional IRA contributions. If you are still working at 70 ½, you can still contribute to an IRA or Spousal IRA. This is extremely beneficial to those who still work part-time, provide consulting services for their former employers, or pick up odd jobs in the gig-economy. If your retirement years include driving for Uber, then you can still stash away tax-deferred money.

The SECURE Act also raised the age for required minimum distributions (RMDs) to 72. Unfortunately, this only affects those who haven’t turned 70 ½ yet. The law provides a little extra time to save more or make Roth IRA conversions before RMDs must begin.

Small employers who offer retirement plans to their employees should also benefit from the new law. The Act will make it easier and less expensive for small businesses to unite to offer Multiple Employer Plans (MEPs). An MEP is a retirement plan that includes more than one company that is not part of a control group or affiliated services group. This means that a small business that may only have $300,000 in their retirement plan could more easily use a Multiple Employer plan. Doing so would provide them easier tax filing, fiduciary oversight, and better pricing, which larger plans often receive.

The SECURE Act also provides a credit for small businesses when they adopt an eligible Automatic Enrollment Arrangement for their retirement plans. This credit is separate from other credits the small business may be eligible for. Auto-enrollment allows employers to place a specified percentage of an employee’s salary into the company retirement plan. Contributions are deducted from each paycheck unless the employee opts out of the plan. Like all participants, auto-enrolled employees have the option to defer more of their salary and change the default investment option. This practice significantly increases the participation rate while helping individuals save for their retirement. The maximum default percentage an employer can set for the auto-enrollment was also increased to 15% beginning in 2020; although, most auto-enrollment plans set a contribution rate around 3%.

While all of these changes likely benefit investors, there was one provision in the SECURE Act that doesn’t benefit investors: the elimination of the Stretch IRA. Previously, non-spousal beneficiaries of an IRA could stretch the RMDs over his or her own life expectancy. With the passing of the Act, non-spousal beneficiaries must deplete the account within 10 years of the death of the owner. Surviving spouses, minor children, and those not more than 10 years younger than the deceased are generally exempt from this new rule. The rule also affects non-spousal beneficiaries of Roth IRAs. While distributions of an inherited Roth IRA are generally tax-free, if the account is not depleted within 10 years of the death of the original owner, the beneficiary could be penalized 50% of the amount not distributed.

These are some of the major provisions of the SECURE Act. The Act also provides liability protection for annuities in plans, exceptions to the early withdrawal penalty for birth or adoptions, and IRA contributions with fellowship and stipend payments. If you have questions regarding how the SECURE Act may affect your retirement accounts, the experts at Henssler Financial will be glad to help: