As 2019 was coming to a close, Congress passed some pretty significant changes to retirement savings laws that will affect just about all of us. It will directly impact individuals in or nearing retirement, new parents, small business owners and employees, and could have a major impact on estate planning.
The changes include increasing the age at which you are required to begin withdrawals from retirement accounts (RMDs) to 72 from 70½; lowering various barriers for small business owners to create retirement savings plans for their employees; and changing the rules for inherited retirement accounts that has a lot of us reviewing, and possibly revising, estate plans and strategies.
The retirement savings bill, known as the SECURE Act, was attached to the massive government spending bill which was approved by Congress in mid-December. The 1,773-page bill was one of two bills passed to fund government operations and averted a government shutdown, which was scheduled to take place on December 20, when the temporary agreement was set to expire.
The SECURE Act, an acronym for the “Setting Every Community Up for Retirement Enhancement,” was approved overwhelmingly by the House back in May, but was stuck in limbo for months in the Senate until supporters pushed for the bill to be included in the must-pass year-end package. While many did expect this to eventually pass through the Senate, the details and timing were still a surprise.
Key provisions in the retirement savings portion of the bill include:
- Change to RMD age: The law raises to 72 from 70½ the age at which individuals must begin taking RMDs from their retirement accounts. Important: The new law only applies to people who turn 70½ after December 31, 2019. If a person turned 70½ in 2019, the law does not apply—that person must take an RMD in 2019, 2020 and beyond.
- Contributions to traditional IRAs after age 70½. The law ends the prohibition on contributing to an individual retirement account (IRA) after 70½. Individuals may continue contributing to an IRA at any age, as long as they have earned income.
- New rules for inherited retirement accounts: Under current law, inherited retirement accounts (often referred to as “Stretch IRAs”) can distribute those assets over the beneficiary’s lifetime. Under the new law, those assets must be distributed within 10 years. This provision has significant estate planning implications and changes to tax and estate planning strategies. We will dive into this in future articles. There are exceptions for spouses, minor children, disabled individuals and people less than 10 years younger than the decedent. Importantly, the bill does not affect existing inherited accounts. It only applies to accounts that are inherited in 2020 and beyond.
- Penalty-free withdrawals for birth/adoption expenses. New parents can withdraw up to $5,000 from an IRA or an employer-sponsored retirement plan to pay for birth and/or adoption expenses, through the first year after the birth or adoption. Taxes still need to be paid on pre-tax contributions, but no penalties apply to the withdrawal.
- Part-time workers can participate in a 401(k) plan. Employees must have worked at least 500 hours a year for three consecutive years in order to be eligible.
- Lifetime income disclosure. The bill requires the Department of Labor to propose rules for a new disclosure to plan participants that will illustrate the participant’s projected monthly income in retirement based on current retirement assets. It’s designed as a kind a “progress report” to show employees how they are doing on saving. The rule-making process for this is likely to take a year or more, followed by an implementation period, so it could be 2021 or 2022 before this becomes standard.
- Makes it easier for annuities to be offered in 401(k) plans. The new law lowers barriers to offering annuities in employer-sponsored plans, though plans are not required to do so. This is one section of the bill that we are concerned could negatively impact investors, as using some high cost annuities instead of low cost investment options will cost employees a lot of their lifetime.
- Change to 529 plans. Assets in these college-savings plans can now be used to repay up to $10,000 in student loans.
- Provisions to help small businesses. We believe this is another big positive from the bill. Several provisions in the bill are designed to make it easier for small businesses to offer retirement plans to their employees, including a provision that will allow unrelated small businesses to band together in so-called “multiple employers plans” to offer a plan to employees. We have been working on this for quite some time and will be announcing more details in the near future.
What Should Individuals Do
While individual circumstances vary, as a general starting point, I would recommend the following individuals pay a little more attention than others:
- Individuals who have turned or will turn 70½ before December 31, 2019, should ensure that they have taken their RMD or have plans to do so prior to the deadline of April 1, 2020. If you turn 70½ on or after January 1, 2020, you will not need to begin taking required minimum distributions until 2022.
- Individuals who have estate plans that include leaving retirement accounts to heirs should consider reviewing those plans with us to determine whether any changes need to be made based on the new law.
- Individuals over 70½ who have earned income should speak with us to determine whether the new rule permitting ongoing contributions to an IRA makes sense for their situation.
- Small business owners who want to learn more about offering a retirement plan to their employees, understand if the new bill can help make it easier for their current retirement plan, or want to learn about “multiple employers plans” should reach out to us to discuss this new opportunity.
We hope this summary helps you understand what the SECURE Act entails and how it may impact you. As always, please reach out with any questions and feel free to pass along to anyone whom you think could benefit from reading this.
Kathmere Capital Management (Kathmere) is an investment adviser registered under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply any level of skill or training. The information presented in the material is general in nature and is not designed to address your investment objectives, financial situation or particular needs. Prior to making any investment decision, you should assess, or seek advice from a professional regarding whether any particular transaction is relevant or appropriate to your individual circumstances. Although taken from reliable sources, Kathmere cannot guarantee the accuracy of the information received from third parties.
The opinions expressed herein are those of Kathmere and may not actually come to pass. This information is current as of the date of this material and is subject to change at any time, based on market and other conditions. This material is not intended to replace the advice of a qualified tax advisor, attorney, or accountant. Consultation with the appropriate professional should be done before any financial commitments regarding the issues related to the situation are made.