Update: In late 2022, Congress passed the Secure Act 2.0, with more revisions that impact the retirement plans of both workers and senior adults, plus a new opportunity for charitable giving for some senior adults with IRAs. Click here to learn more about Secure Act 2.0.
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With little fanfare, the U.S. Congress recently passed new legislation that will impact both those still saving ahead for retirement and those already retired.
The SECURE Act (the acronym stands for “Setting Every Community Up for Retirement Enhancement”) is aimed at making it easier for working-age people to save for retirement. The government is understandably concerned that so few people are able to save successfully for their own retirements. This legislation alone won’t cure that problem, but it offers some modest help.
At the same time, the SECURE Act includes changes in the ways retirees and their beneficiaries can withdraw money from retirement accounts.
In this article, we will give an overview of some of the key provisions and how they may impact you and your family. Since everyone’s tax and investment status is different, please consult your professional advisors if you have questions about how the SECURE Act applies to you.
Delaying the start of Required Minimum Distributions
Thanks to the SECURE Act, retirees may now postpone the start date for making Required Minimum Distributions (RMDs) from IRAs and other retirement plans. The bill changes the required start date to age 72, compared with 70 ½ previously. Most retirees are already drawing money from their IRAs prior to age 70, so this provision may have little practical effect on them. On the other hand, some retirees don’t need the extra income from their IRAs and don’t want the added tax liability incurred when funds are withdrawn. For these retirees, this delay will mean an extra 18 months for their retirement accounts to grow and at least another year or two before forced taxable withdrawals must begin.
It’s important to note that people who turned 70 1/2 in 2019 must still take their RMD withdrawal for 2019 no later than April 1, 2020. If you are over 70 1/2 and already receiving RMDs but not yet age 72, you must continue on your previous schedule, despite the new law.
Tax-Saving Charitable Giving Benefit Still Available at Age 70 1/2
The government allows people age 70 1/2 and over to give up to $100,000 per year to charities directly from their traditional IRAs, with no tax on the withdrawal. It may be the only way to withdraw money from your traditional (not ROTH) IRA without incurring any tax liabilities. In recent years, this “IRA Charitable Rollover” has been a popular charitable giving strategy for older Americans, especially toward year end. Many age-qualified taxpayers have used this benefit to avoid paying tax on their RMDs. In other words, if the government says you must withdraw $30,000 from your IRA this year for your RMD, you can instead donate $30,000 to charity (directly from your IRA), count it as your RMD, and avoid tax on the withdrawal.
It’s important to note that Qualified Charitable Distributions from IRAs are not limited to the RMD withdrawal amount. A person can donate up to $100,000 annually from their IRA (assuming they have that much in their account) even if the RMD is much less. None of the withdrawal is taxable.
Even though the SECURE Act bumps the RMD required start date up to age 72, Qualified Charitable Distributions may still be taken from IRAs beginning at age 70 ½. Charitities will be pleased with this decision, but there is still concern among the nation’s nonprofits that some taxpayers will now choose to delay the start of making charitable donations from their IRAs until age 72, when RMD withdrawals now start. Time will tell, but the IRA Charitable Rollover remains a valid tax-saving charitable giving strategy.
IRA Contributions Now Allowed Beyond Age 70 1/2
In the past, you could not continue contributing to your traditional IRA past age 70 1/2, even if you were still working. The SECURE Act removes that barrier. Now, as long as you have earned income, you may continue to put money each year into your IRA. More people in their 70s (and even beyond) are still working these days, so this change makes sense. Why should older workers be prohibited from saving for their future? It will also be a real bonus for Americans who, for whatever reason, reach the traditional retirement age and don’t yet have enough money saved for retirement. Now, they can sock more money away to provide for increased income and resources for their final years.
Not So Good News for your Beneficiaries
While the SECURE Act is generally good news for both working and retired people, it eliminates a popular tax-saving, estate-planning strategy for IRA beneficiaries. Previously, beneficiaries who inherited an IRA could extend withdrawals over many years, based on their life expectancy. For younger beneficiaries, this could mean potentially keeping an inherited IRA going for several decades, with the tax liability spread over those years. This strategy was referred to as the Stretch IRA. Aside from the tax benefits, an inherited IRA could potentially grow significantly over such a long period of time, even as annual withdrawals were being made.
Under the new law, non-spousal beneficiaries must withdraw all assets from an inherited IRA account in no more than 10 years. This will add to the annual tax burden from those fully taxable withdrawals and eliminate the potential for the accounts to grow for younger beneficiaries. Spouses may continue to make RMD withdrawals from inherited IRAs over their expected lifetime.
As with most laws, the devil is in the details. While the above wording describes the general rule for beneficiaries of inherited IRAs, there are exceptions for disabled beneficiaries and minor children. If you believe these exceptions apply to you, please talk with your tax advisor to learn the details.
Helping Workers Save More for their Future
Several provisions in the SECURE Act are designed to help employees save more for retirement during their working years. Here are the highlights:
- Auto Enrollment: Small employers are being offered an additional tax credit to encourage them to offer a 401(k) or SIMPLE IRA with auto enrollment. Experts believe that auto enrollment, where all employees are automatically signed up to participate in a retirement plan, will help employees save more. Based on statistics from the Bureau of Labor Statistics, nearly one third of eligible employees in companies that offer 401(k) plans do not participate. Auto enrollment could change that.
- Benefits for Part-Time Employees: Employers must now offer retirement plan participation to part-time workers who have been on the job at least three years. In the past, part-time employees often were excluded. This new provision doesn’t become effective until 2021 to give businesses more time to prepare.
- Helping Small Businesses Offer Retirement Plans: The bill makes it easier and less costly for small businesses to offer retirement plans. Small businesses may now join with other small employers to share overhead cost and administration of their retirement plans.
- Lifetime Income Statements and Annuities: Employers with 401(k) plans must now provide an annual statement to all participants that shows expected lifetime income, based on their account balances, age, and contribution rates. It also makes it easier for employers to add annuity contracts, which traditionally offer a lifetime income option once the employee retires.
- Benefits for New Parents: Parents may make penalty-free withdrawals from IRAs, 401(k)s and other retirement plans for the birth or adoption of a child. Each parent may withdraw up to $5,000, so a couple with their own separate IRA or 401(k) accounts could potentially withdraw up to $10,000. Please note that the SECURE Act does not waive the taxes due on the withdrawals but only the early-withdrawal penalties.
You may read a copy of the SECURE Act at https://www.congress.gov/bill/116th-congress/house-bill/1994.
The SECURE Act alone isn’t going to guarantee that most Americans are adequately prepared for retirement, but it is a small step in the right direction. The bill’s impacts on current retirees, especially those over age 70 1/2, are more immediate and significant. It’s worth your time to take a hard look at how this legislation may affect you and your family.
Note: As with any significant investment, legal or tax decision, we recommend you seek professional advice before taking action. This column is for informational purposes only and is not to be construed as offering investment, tax or legal advice.
