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The Basics of The SECURE Act

Signed into law by President Trump on December 20, 2019, the “Setting Every Community Up for Retirement Enhancement Act”, also known as the Secure Act, is intended to increase access to tax-advantaged retirement accounts, helping older Americans in retirement and encouraging employers to offer 401(k) plans.

The new act, which went into effect on January 1, 2020, affects IRAs, 401(k) plans, and other retirement accounts.

What Has Changed

The Secure Act has made several changes related to tax advantaged accounts:

  • Increasing the cap for small businesses to automatically enroll workers in safe harbor retirement plans from 10% of wages to 15%.
  • Providing a $500 tax credit per year to employers who create a 401(k) or Simple IRA plan with automatic enrollment.
  • Allowing businesses to enroll part-time employees who have worked 1,000 hours throughout the year or 500 hours for three consecutive years.
  • Encouraging plan sponsors to offer annuities in their 401(k) plans by reducing their liability if the insurer can’t meet its financial obligations, and also not requiring them to choose the lowest-cost plan.
  • Removing the “one bad apple rule” for multiple employer retirement plans, which required that all of the participating small businesses meet the plan requirements or it failed for all of them. Now multiple employer plans will enjoy the economy of scale and be able to provide more plan features.
  • Changing the age of required minimum distributions (RMDs) on retirement accounts from 70½ to 72.
  • Eliminating the maximum age for traditional IRA contributions, which was previously capped at 70½ years old.
  • Allowing a penalty-free withdrawal of $5,000 from 401(k) plans to help with the costs of having or adopting a child.
  • Allowing the use of $10,000 annually from 529 plans to repay student loans.

Another change is the removal of the stretch IRA, which is estimated to raise $15.7 billion in tax revenue. This rule allowed non spouses who inherited an IRA to stretch the disbursements over their lifetime. With the new rule, non spouses who inherit an IRA will be required to take a full payout from the account within 10 years of the original account owner’s death, beginning with account holders who die in 2020. With the changes to inherited IRAs, it will be important for account owners to review their estate plans and the potential tax consequences.

The Jury Is Out

While it will take time for the jury to come in on whether the Secure Act will make positive changes in helping Americans save for retirement, many financial experts appear to be optimistic and believe it is a step in the right direction. As expected, other experts feel it will have a limited impact on saving.

One thing experts can agree on is that Americans are currently not financially prepared for retirement, and changes are needed to put people on the path toward financial security. Hopefully, the Secure Act is the impetus for that change. Please call if you’d like to discuss this in more detail.

If you have any questions regarding The Secure Act, contact us.

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