The SECURE Act is an act that was passed by Congress on December 20th, 2019 that introduces new benefits for employees and employers. These new benefits are meant to encourage companies to offer retirement plans — and to encourage more people to save for retirement.
So, how might the act affect you?
To answer this question, I brought Salvatore Albanese of Salvatore Albanese and Company LLC on to episode 60 of the Retire Right Podcast to help break down what the SECURE Act is and what changes it will be bringing to the retirement world.
Read on to find out what Sal had to say about the SECURE Act!
To promote additional savings for those saving for retirement, the SECURE Act has increased the contribution limit on the amount of your salary that you’re able to save through automatic-enrollment safe harbor plans from 10% of your paycheck to 15%. Since this new contribution also includes auto- enrollment, you will now have to opt out of the saving increase, rather than opting in.
Safe Harbor 401(k)
Another thing the act has changed is the safe harbor 401(k) rules. They've now eliminated the safe harbor notice requirements, which requires notice to be provided at least 30 days (and no more than 90 days) before the beginning of the plan year. Now, they've allowed amendments to be made to non- elective status within 30 days prior to close, and they've changed the rules so you can still make an amendment after 30 days — but now you'll have to make a 4% non-elective contribution instead of a 3% contribution.
With the act, Congress is trying to encourage more companies to offer 401(k) plans and to set up new pension plans for their employees.
To do so, in the past they gave employers a $500 credit for setting up a new pension plan. Now that $500 has been increased to $5,000 in certain circumstances. The act also encourages small business owners to adopt automatic enrollment by giving employers an additional $500 of tax credit for three years if they enroll in that plan.
Changes for Employees
One of the biggest changes the act introduces for employees is that they’ve changed the maximum age for traditional IRA contributions. Prior to January 1, 2020, once you reached age 70 and a half, you were required to take an RMD (required minimum distribution). Now, they've pushed that age back to 72, meaning that if you turn 70 and a half in 2020, you're no longer required to take a distribution by the following April 1st. This change can provide a tremendous opportunity for funds to continue to be 100% reinvested and therefore generate much higher, deferred amounts.
As for IRA inheritances, the beneficiary of an inherited IRA will no longer be able to defer and receive the RMDs over their life expectancy under the new law. For most beneficiaries, you’re now required to take RMDs over the next 10 years after receiving the inheritance.
Under the old law, if I were a beneficiary of an inherited IRA, I would be able to stretch it over my lifetime — and depending on my age, it could be 20, 30, or 40 years. Under the current law, you’re forced to take it over 10 years, which means that the annual amount of RMDs is likely going to be five to even six times higher than the normal distribution for the average person. This could possibly kick you up into a much higher tax bracket over those 10 years rather than stretching it over your lifetime.
However, there are some exceptions to these rules. These include:
If you are a spouse of an inherited IRA, the rules don’t change. You're able to continue to take RMDs over your life expectancy.
If the beneficiary is within 10 years of the deceased age, you're also able to receive RMDs over the lifetime of the beneficiary.
If you're a minor who received an inherited IRA, you're also able to stretch it, not over the life expectancy of the individual, but for 10 years plus the years that it takes for you to become a legal adult.
Another change that the act introduced is the hours an employee has to work to be eligible to be participants in a company’s 401(k) plan. Now, employees who work 500 hours a year for three consecutive years are now eligible to be participants in company 401(k) plans, whereas beforehand they had to work 1000 hours a year to be eligible.
Congress additionally wants to encourage the filing of timely and accurate information, so they’ve also introduced some new penalties. A big one is the penalty for filing the tax return for your retirement form late.
In the past, if you failed to file a Form 5500, which is the tax return for a retirement plan, it was a $25 per day penalty with a maximum fine of $15,000. Now, the SECURE Act has increased that significantly. The penalty is now $250 a day for filing a tax return late with a maximum fine of $150,000.
With the introduction of the SECURE Act, how can you adapt your planning to fit in with all the recent changes?
One of the things that we believe you need to look at is the inherited IRA, where now suddenly beneficiaries have to take RMDs over a 10-year period. That gives us a much shorter period of time to be able to absorb the funds coming in. And remember: A traditional IRA is a tax deferral account, which means that when the beneficiary receives the distribution, the beneficiary has to pay taxes on the amount that he or she receives. Since the time frame is a lot shorter, the tax bill is going to be a lot higher, especially if the beneficiary has sufficient income and most likely is probably at the highest bracket to begin with.
So, taking a look at your traditional account and determining whether it's time to convert to a Roth is an important thing to do. In addition, regardless of your age, any time you have a down year, if you have income that is suddenly not doing well in any one particular year where you are able to absorb income, you may want to consider taking a distribution. You don't need to wait until you're 72 to take that distribution out of your traditional IRA — although you have to be over 59 and a half to avoid the penalties.
There are several other planning considerations that may fit your circumstances and needs — which is why it’s important for both from the employers side as well as the individual side to take notice of these changes and to talk to your accountant and your financial advisor about what’s right for you.
If you have any questions or concerns about the SECURE Act and how it might impact you, please don’t hesitate to reach out to us here at Heller Wealth Management — we’re here to help!
Until next time!