On December 20th, 2019 President Trump signed a $1.4 trillion bipartisan spending package which included the SECURE Act. The bill includes changes that will impact Individual Retirement Accounts (IRAs), as well as 401(k) plans and traditional pension plans.
The SECURE act makes several minor changes to 401(k) plans. Businesses can receive a larger tax credit for starting a new retirement plan. Businesses can also benefit from a new tax credit for launching a plan with automatic enrollment of employees. Under the new law, more part-time employees will be eligible to participate in 401(k) plans. The limit for automatic increases of participant contributions was raised to 15% of salary.
The new law also includes benefits for retirees and older workers. People who choose to work beyond traditional retirement age will be able to continue making IRA contributions as long as they are earning income.
Uses of 529 Plan Funds Expanded
The SECURE act has provisions that will greatly help parents who are saving for their children’s education. These provisions expand the list of allowed tax-free uses of funds in 529 plans. Starting in 2020, 529 plan distributions can be used to pay for apprenticeship programs. Only apprenticeship programs registered and certified with the Department of Labor will qualify for a tax-free distribution. Tax-free distributions from 529 plans can also be used to make qualified student loan repayments. The lifetime limit for loan repayments is $10,000.
Insurance Companies Want Your 401(k) Plan
The SECURE act contains some provisions that are less than favorable for retirement savers. The new provisions, lobbied for by the insurance industry, are an end-run around attempts to regulate the sales of insurance products to retirement plans. The insurance industry previously won its fight against the Department of Labor’s fiduciary rule. The SECURE Act’s new annuity-friendly provisions will protect employers from much of their responsibility for fiduciary obligations if they allow insurance companies to sell products inside their retirement plans. Participants in retirement plans will have to watch their plans more carefully and be sure they understand what they are investing in.
Higher Age for IRA Required Minimum Distributions
Previous regulations required individual retirement account owners to begin taking distributions after age 70½. The new law increases this to age 72. The new, higher age will help retirees who don’t need immediate income from their retirement accounts. It will also help retirees who continue to work into their 70’s. IRA owners who turn age 70½ in 2020 or later will benefit from the increased age limit.
Changes to Inherited Retirement Accounts – “Stretch IRA” Eliminated
Under the previous law, if you inherited an IRA, you could spread out distributions from the inherited account over your lifetime. This strategy was known as a “Stretch IRA”. Stretch IRAs offered two benefits: the inherited account could continue to grow tax-deferred, and the tax bill would be spread over many years.
The new law requires inherited retirement accounts to be distributed within 10 years. There are exceptions for spouses, disabled individuals, and individuals no more than 10 years younger than the account owner. There is also a partial exception for accounts inherited by minors.
The new law will significantly increase income taxes for some IRA beneficiaries. These changes will also impact estate planning and trusts created to managed inherited IRA assets. Roth conversions are one tool that IRA owners can use to better manage the tax impact of accounts that will be left to beneficiaries. If you have an IRA that you intend to leave to a beneficiary, or if you expect to be the recipient of an inherited IRA, it is wise to seek professional advice on how the new law will impact your planning. The new rules place IRAs at the intersection of estate planning and income tax planning. It is crucial to seek advice from an advisor competent to practice in both areas.
The act’s provisions are set to become law on January 1st, 2020. For help understanding how the SECURE act will change your retirement plan, consult a tax and financial planning professional.
Matthew Treskovich is the Chief Investment Officer for CPS Investment Advisors