A new year brings new changes, and in 2020, the recently enacted SECURE Act is set to alter retirement and estate planning for the future. SECURE, an acronym that stands for “Setting Every Community Up for Retirement Enhancement,” enacts provisions intended to make retirement savings plans more accessible, while changing a handful of existing rules.
So how will the SECURE Act impact you and your retirement savings?
According to the U.S. Department of Labor, 38 million private-sector employees do not have access to a workplace sponsored retirement plan. Fifty-three percent of these workers are employed by a business with less than 100 employees.
Access to retirement savings is a growing concern in the U.S., as 44 percent of individuals do not believe that Social Security payments will provide enough income for them to live on. Add in the fact that the Social Security Trust Fund is expected to be depleted within 15 years, the U.S. faces a real retirement crisis.
Enter the SECURE Act. With provisions to benefit small businesses, the new ruling could open doors to retirement savings for more individuals.
Within the SECURE Act, small businesses in different industries will be able to join association retirement plans offered through groups, such as a local chamber of commerce, or join pooled plans offered by a single provider such as a record-keeper, administrator or investment advisor. The move allows small businesses to offer retirement savings options to employees while defraying some of the prohibitive costs and time-consuming tasks associated with providing these benefits.
In addition, the tax benefits for small employers to begin offering retirement plans have been dramatically increased. An employer can now receive a tax credit equal to half of the first three years’ administrative costs, up to $5,000 per year. If the employer agrees to automatically enroll employees in the plan, they will receive an additional $500 per year credit. The SECURE Act also makes it easier for employers who offer workplace retirement plans to include annuities in their plan lineups. With annuities, employees’ contributions into the plan throughout their working years fund the annuity, which then provides a lifetime stream of income in retirement.
While the SECURE Act could make it easier for more Americans to save for retirement, a few of the rulings are designed to benefit those who have already begun saving. For example, under former rules, individuals were required to start drawing a required minimum disbursement (RMD) from Individual Retirement Arrangements (IRAs) at age 70 ½.
RMDs are based on the account balance as of December 31st of the prior year, divided by the life expectancy of the individual as determined by tables provided by the IRS.
Under the SECURE Act, RMDs have been moved out to age 72 for those who turn 70 ½ on or after January 1, 2020. The additional one and a half years is of benefit to those who do not need to draw from the balance of their IRAs to fund their retirement living.
The SECURE Act also scales back some of the restrictions regarding when retirement funds can be used. Plans will be able to allow individuals to withdraw up to $5,000 of retirement plan savings to cover expenses related to the birth or adoption of a child with no penalty. However, the impact to an individual’s long-term retirement outlook should always be considered before any disbursements are made from retirement plans.
In addition, the SECURE Act allows up to $10,000 of 529 funds to be used toward the repayment of student loan debt.
For long-term financial planning purposes, the SECURE Act places limitations on the stretch IRA. Stretch IRAs have typically been used to pass retirement savings down to future generations, allowing the beneficiary to draw RMDs according to their (typically) much longer life expectancy. As a result, individuals of such an inheritance were able to draw from inherited retirement accounts often over decades, thereby “stretching” the tax deferral on the inherited funds.
Under the SECURE Act, individuals will now be required to draw down the balance within 10 years of receiving the inheritance. However, the law does allow five exceptions, allowing surviving spouses, minor children, chronically ill, disabled beneficiaries and those who are no more than 10 years younger than the IRA owner, to stretch RMDs according to their life expectancy.
For many, the elimination of the stretch IRA is of little consequence, as their financial plan projects them using the lion’s share of their retirement funds. For others, their financial plan foretells a sizable balance upon their passing. With the passing of the SECURE Act, it’s important that those individuals undergo additional planning.
Specific strategies to consider are always dependent on your goals and objectives in discussion with your financial planner. No matter what your plan is, it’s important to always take into account the question that is difficult for most of us to answer—when will we pass? It’s important to keep in mind that retirement and estate planning require an individualized approach. For the best guidance on adapting to the SECURE Act, consult your financial planner for professional advice.
About the Authors
Dan Kline is a Financial Planner with the Private Client Advisory and Financial Planning teams within the Wealth Management group at FNBO. He specializes in providing comprehensive personalized financial planning incorporating investment, tax, protection, retirement and estate planning strategies.
Charles Smith is Director of Retirement Plan Advisory Services for FNBO. In this position he has the overall responsibility for the coordination and delivery of investment advice, fiduciary consultation and vendor searches for retirement plan sponsors and investment committees.