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The full House passed by a 297-120 vote on December 17, 2019 the year-end spending bill, which includes the Setting Every Community Up for Retirement Enhancement (SECURE) Act.
The SECURE Act, HR 1994, is being billed as the most comprehensive retirement security legislation in more than a decade. The Senate voted 71 to 23 to approve the legislation. The president signed it into law on December 21st.
What does the SECURE Act accomplish?
The SECURE Act:- simplifies the 401(k) safe harbor rules;
- expands portability of lifetime income options;
- allows long-term part-time workers to participate in 401(k) plans;
- allows plans adopting by the filing due date to be treated as in effect as of the close of the year;
- provides a fiduciary safe harbor for selection of a lifetime income provider;
- modifies the treatment of custodial accounts on termination of 403(b) plans;
- extends the current required minimum distribution requirements to age 72;
- requires disclosures regarding lifetime income; and
- modifies the nondiscrimination rules to protect longer-service participants.
How the SECURE Act Affects…
Retirees
Current law requires that participants start withdrawing from their retirement savings accounts at 70.5. The new bill raises that minimum age to 72. The law also changes the maximum age for contributing to a traditional IRA, also currently set at 70.5. This is good for retirees because it delays the time when they have to take their required minimum distributions which are taxed at ordinary tax rates.
Beneficiaries
The SECURE Act would make significant changes to inherited retirement plans like 401(k)s, traditional IRAs, and Roth IRAs. In the past, beneficiaries of these accounts could typically spread the distributions or “stretch” them over their own life expectancy (which could be a long time if the beneficiary was a grandchild for example). However, under the SECURE Act, the “stretch” provision has been removed and the new bill requires most beneficiaries to distribute the account over a 10-year period. This change would accelerate the depletion of inherited accounts for many large IRAs and retirement plans.
Students
The SECURE Act would also expand the uses for 529 accounts, an investment vehicle that helps individuals save for college and certain education costs. Currently, taxpayers who use 529 plan money for anything other than qualified education expenses are subject to a 10% federal tax penalty. However, the new bill allows individuals to use 529 funds for qualified student loan repayments of up to $10,000. This is great for HENRYs and millennials who have large student loans.Parents
The bill would allow new parents to withdraw up to $5,000 from their retirement accounts to cover qualified costs associated with a new birth or adoption. Since Compassion is one of our Core Values, we are excited about this provision as it may encourage more adoptions.
Employees
Current laws allow employers to exclude their part-time employees from eligibility for a 401(k) plan. However, under the SECURE Act, your employer must allow you to participate in its defined contribution plan if you work at least 500 hours a year and have been at the firm for at least three consecutive years.
The bill also requires defined contributions plans to deliver a lifetime income disclosure to participants. This disclosure would essentially show how much income the lump sum balance in the retirement account may generate–in hopes of encouraging saving.
Employers
The SECURE Act would essentially allow small employers to come together and offer 401(k) plans with less fiduciary liability concern and less cost. The goal is to try to expand small employers’ capability to offer some form of retirement savings to employees.
The Act also offers a new tax credit of $500 to help some smaller employers encourage automatic enrollment into their retirement plan. This small credit could help offset some of the costs of operating a plan at the beginning. According to behavioral finance which is one of our three pillars of financial thought, automatic enrollment has seen great success in increasing plan participation by employees.
Last Thoughts…
The SECURE Act has sweeping and broad implications for financial, tax, and retirement planning. If you aren’t working with a fee-only fiduciary advisor, we’d love to introduce ourselves. If you would like to consider outsourcing your financial stress, please consider giving us a call. We’d be happy to have a short conversation with you to see if we can serve you and your family. Click here to learn more about our firm, or click the link below to schedule an anxiety-free call or meeting.
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