Trump signed The SECURE Act (The Setting Every Community Up for Retirement Enhancement Act) into law in December 2019. This Act includes many reforms in retirement savings plans. Let’s summarize what you need to know.
1. Increasing the age for Required Minimum Distributions (RMDs) to age 72. Keep in mind this new law only applies prospectively to those turning age 70.5 after December 31.2019. So, if your 70th birthday was on or before July 1st, 2019, you must still take an RMD in 2019 and every year going forward.
2. More tax-deductible contributions after age 70.5. In the past, you could make tax-deductible contribution as long as you had earned income up to age 70.5. Now, under this Act, you can make tax-deductible contributions to any ROTH or IRA until you reach age 72 with earned income.
3. Now permanent part time workers are eligible to start a retirement plan. A permanent part time employee is someone who works 500 hours per year for three years in a row . This Act allows small businesses greater access to offer plans to employees. For example, by using the multiple employer plans, two or more employers who are not related to each other can partner together to create a cost-efficient retirement plan with less fiduciary liability concerns.
4. $5000 Penalty-free IRA withdrawals in the case of birth or adoption. The withdrawal will not be subjected to a 10% early withdrawal penalty, but the withdrawal itself is still taxable and, to avoid the 10% penalty, the withdrawal must occur within the first year of birth or adoption. Mind you, it is generally not a good option to withdraw retirement funds for birth or adoption expenses and, hopefully, every family would have savings tucked away for emergencies and unexpected expenses.
5. No more stretching distributions from inherited IRAs. This Act newly requires beneficiaries to withdraw all Inherited IRA assets within 10 years after their benefactor’s death. Truthfully, you will need mindful estate planning. It does not affect existing inherited IRA distributions. You can still convert Inherited IRA assets into a ROTH IRA but only if the Inherited IRA came from your spouse.
6. This law encourages employers to offer a guaranteed lifetime income option. While 75% of 401K participants enjoy some type of guaranteed income option, only 9% of companies actually offer annuities options. Now, the threshold is lower and the liability will be shifted from the employer to the insurer if and when annuity payments are not fulfilled. This opens all kinds of opportunities for insurance companies to offer their products inside of retirement plans.
7. There is a $500 Employer tax credit for auto-enrollment, which is intended to help smaller employers offset the cost of setting up a plan.
8. This law also requires defined contribution plans to disclose lifetime income illustrations to participants at least once a year. It is meant to educate employees regarding how much lifetime income is to be expected from their retirement account balance.
Now you know what The SECURE Act means to you. It is a good reason to review your trust plan, beneficiary designation, retirement income saving options, ROTH IRA conversions, investment planning prior to age 72, and small business planning.
If you are interested in learning more about the financial planning process at KW Wealth Management, you can request a free consultation.
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