Congress has passed the most significant piece of retirement legislation this decade, with provisions for nearly every retirement vehicle included. The Setting Every Community Up for Retirement Enhancement (SECURE) Act will change the way Americans plan for retirement—with both good and yet-unknown ramifications. The SECURE Act was passed as part of the greater 2020 appropriations bill. Here’s a quick look at the provisions.
Increased age for IRA contributions and RMDs
In one of the simpler provisions outlined in the bill, the age for required minimum distributions (RMDs) has been raised from 70½ to 72. Alongside this, individuals can now also make contributions to traditional IRAs so long as they’re currently working. This aligns traditional IRA contribution rules with those of Roth IRAs and 401(k) plans. It’s a move designed to support an aging workforce and rising life expectancies.
This legislation could be further affected by pending IRS rules regarding RMDs. The result is that retirees may be required to take less of an RMD each year of their retirement.
Changes to inherited IRA rules
The SECURE Act will also change the way inherited IRAs are handled in the case of various beneficiaries: spouse, non-spouse, and non-person. In simplest terms, the new legislation eliminates lifetime benefits and replaces them with a 10-year window for withdrawal for beneficiaries. It’s a decision that’s almost sure to incur big tax penalties for beneficiaries of pass-through trusts and inherited IRAs. The silver lining? Those already drawing from inherited IRAs as of January, 1 2020 with be grandfathered in with their current RMDs.
Part-time 401(k) contributions
In another effort to bolster retirement planning and contributions among workers, the SECURE Act has opened 401(k) contributions to part-time workers. Effective immediately, workers logging a minimum 1,000 hours in one year (~20 hours a week) or three consecutive years of at least 500 hours, can participate in employer-sponsored 401(k) plans.
This provision takes aim at new entrants to the workforce and employed seniors—groups more likely to work part time. This makes them well-positioned to capitalize on retirement planning. Small businesses also benefit, receiving up to $500 in tax credits when employees are automatically enrolled in a 401(k) or simple IRA.
Rollback to fiduciary requirements
One of the more polarizing stipulations of the SECURE Act takes aim at annuities. The bill paves the way for annuities to be included in 401(k)s. However, it does so by removing some fiduciary requirements that may ultimately protect consumers. While there’s tremendous demand and potential for annuities within the scope of retirement planning, many feel it shouldn’t come at the behest of looser standards. Time will tell if there are any rippling effects from this rollback of requirements.
Changes to retirement planning
With these new provisions, the SECURE Act is sure to shift the tax planning landscape. Financial planners, employers, investors and retirement-conscious individuals all need to reevaluate their stance on retirement planning—particularly as it pertains to lifelong income. While it’s unknown what effect some of these changes will have, it’s safe to say there will be changes to contend with. Consult with a tax planning professional today to get ahead of them.
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