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SECURE Act Changes the Game for American Retirement Planning

By: Joe Dillon, CFP® and Frances Cronlund, CIMA®, CExP™, CTFA, CFP®
3 Minute Read

After stalling in the Senate for nearly seven months, it’s finally official. Shortly before many Americans left the office to celebrate the holidays, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was enacted as part of a $1.4 trillion spending package. As we head into the ‘20s, this new act represents the most comprehensive and sweeping set of changes to retirement legislation in more than a decade.

The SECURE Act was passed alongside new IRS cost-of-living adjustments for tax year 2020. To start planning your 2020 changes as soon as possible, Curi Capital has gathered the most important information and insight to help you understand the potential implications of this new legislation.

The SECURE Act

The SECURE Act is designed to help Americans more easily participate in tax-advantaged retirement accounts. Furthermore, this legislation provides assistance to employers attempting to provide high-quality retirement savings opportunities for their employees. Some of the most notable beneficial changes for employers include:

For Business Owners:

  • Increased tax credit (up to $5,000) for small businesses starting a new retirement plan
  • A new tax credit of up to $500 for employers that launch a SIMPLE IRA or 401(k) plan with auto enrollment. The credit applies for three years.
  • Ability to exclude part-time employees in retirement plan non-discrimination testing purposes
  • Easier access to join multiple employer plans (MEPs) regardless of industry, geographic location, or affiliation
  • Increased ceiling for participant contribution to auto-enrollment safe harbor plans to 15 percent of salary (up from 10 percent)
  • Greater ability to offer lifetime income annuities within retirement plans

For Individuals:

  • No longer necessary to start taking Required Minimum Distributions (RMDs) from individual retirement plans starting at age 70 ½ with the ability to delay until age 72
  • Qualified Charitable Distributions of up to $100,000 from an IRA allowable beginning at age 70 ½
  • Eliminated age limit for traditional IRA contributions (formerly 70 ½), assuming there is earned income
  • Retirement Plan statements to include new information about how much of a participant’s plan assets can be received as a monthly income over their lifetime

Good-bye Stretch IRA

While many of the provisions in the SECURE Act will provide greater opportunity for individuals and business owners, there is one significant drawback for investors with significant assets in traditional IRAs and retirement plans—namely, the total elimination of the “stretch IRA” for future inherited IRAs (traditional or Roth).

This change may require the most urgent attention, as it will eliminate longstanding provisions allowing non-spouse beneficiaries who inherit traditional IRA and retirement plan assets to spread distributions (including tax obligations) over their lifetimes. This ability was frequently referred to as the “stretch IRA” rule. However, with the newly enacted SECURE Act, any beneficiary who is more than 10 years younger than the account owner must distribute the account within 10 years of the owner’s death.

The same is true for beneficiaries who are an IRA Trust, which may affect estate plans.  The only exceptions to the 10-year distribution rule are if the beneficiary is a spouse, a disabled or chronically ill individual, or a minor child.

For individuals who would like to revisit their estate planning strategies in light of this new legislation, we urge you to reach out to your financial advisor and learn how to prevent your heirs from potentially facing unexpectedly high income-tax bills on a future inherited IRA.

The Rest of the SECURE Act

The SECURE Act also had a few tax-law changes that had little to do with retirement planning.

  • College 529 savings accounts now usable for student loan payment up to a $10,000 maximum lifetime limit
  • Ability to deducted expenses that exceed 7.5% of adjusted gross income in 2019 and 2020 for taxpayers with high medical bills (note—the former 10% threshold on medical expenses will return in 2021)
  • $5,000 lifetime IRA withdrawal allowed without penalty if used for childcare costs on a qualified birth or adoption
  • Repealed “kiddie tax” rules from 2017, putting tax rate back to the parents’ top marginal tax bracket

IRS Cost-of-Living Adjustments

 In addition to the SECURE Act, the IRS issued new contributions to individual 401(k) and other retirement plans, effective January 1, 2020. Some of the most notable changes include:

  • Maximum employee 401k, 403b, 457 plan deferral limits increased to $19,500
  • Employee catch-up contribution for participants who are 50+ rises to $6,500
  • Combined employer/employee contribution increased to $57,000 for participants younger than 50, and $63,500 for participants who are 50+
  • Annual compensation limit for calculating contributions increases to $285,000
  • Highly Compensated Employee limit rises to $130,000

For more information about the SECURE Act and IRS cost-of-living adjustments for your personal wealth and estate planning or your business’ retirement plan, please contact Curi Capital at 984-202-2800.

Joe Dillon, CFP® and Frances Cronlund, CIMA®, CExP™, CTFA, CFP®

Joe Dillon is Curi Capital’s Director of Retirement Plan Solutions, based in Raleigh, NC.. Frances Cronlund is Curi Capital’s Senior Director of Wealth Planning, based in Raleigh, NC.

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