Tax legislation affecting retirement savings happens about every ten years, but how effective are they in getting people to better prepare for their future? The new Setting Every Community Up for Retirement Enhancement (SECURE) Act was designed to expand options for retirement savers. The SECURE Act represents one of the most significant updates to retirement plan legislation since the Pension Protection Act of 2006. New legislation may sound exciting, however, as in most cases, the details are more complicated than what they seem. There are many unanswered questions and we await Internal Revenue Service (IRS) regulations to better tell us how the new laws will work. Nevertheless, this article is to provide a brief summary of key provisions that you should consider discussing with your trusted advisors as well as your tax professionals.
Cast a Wide Net
Encouraging access to workplace plans and expand retirement savings.
- There are provisions to encourage small employers to adopt plans. For example, an employer may adopt a new plan after year end but before the due date of their tax return. This provision might enable 401(k) adoption by Sept. 31 (extension deadline for corporate returns). However, you may be unable to make deductible employee contributions for that year if Dec. 31 has already passed and payroll is closed.
- Part-timers (working more than 500 hours) may be eligible to participate in a 401(k). However, it appears there’s no cost to employers (e.g. matching contributions, profit sharing, etc.).
- There is no age limitation for making individual retirement account (IRA) contributions for those who work later in life (past age 70-1/2). Also, the age for making required minimum distributions (RMD) has been pushed back to age 72 (unless you turned 70-1/2 in 2019).
Disclosure and Information
Providing more information and timely reporting.
- The Lifetime Income Disclosure Act starting next year is intended to inform the participant what their accumulated 401(k) balance might be worth on a monthly or annual basis. The methodology has yet to be determined, however, we understand it to be a single life, annuity payment without a cost of living adjustments.
- Penalty for late filing of benefit returns has substantially increased tenfold.
Congress wants IRAs and other tax-advantaged accounts for retirement, and not for passing wealth to heirs.
- Removal of “stretch” IRA provisions for inherited IRAs has been eliminated for most beneficiaries (excluding surviving spouses, minor children up to majority, disabled and chronically ill individuals and individuals not more than 10 years younger than the IRA owner). For example, if your adult children are IRA beneficiaries, they would need to withdraw all funds from the inherited IRA (taxable to them) within 10 years. They can no longer stretch the distributions over their lifetime. This may obliterate IRA trust planning and may encourage unnecessary Roth IRA conversions. For example, do you want to pay your kids’ taxes if they’re likely to inherit your IRA? Also, this may be another reason to revisit the naming of charities versus your loved ones as IRA and Trust beneficiaries.
It’s debatable whether the SECURE Act will move the needle in making more Americans retirement ready. Roughly a third of America has inadequate savings but will small modifications to savings plans be a solution to those with spending problems or rising living costs? It may help those who are responsible and prioritize saving and clearly, this is a nod to product providers. Nevertheless, let’s control what we can control. Secure your future wisely.