SECURE Act is changing retirement
This past December, Congress passed a spending bill, The Setting Every Community Up for Retirement Enhancement (SECURE) Act, making big changes to rules for retirement savings plans. The provisions are generally positive for individuals saving for retirement and small businesses alike, but may hurt those who inherit traditional IRA’s. The following are some major points that are likely to affect a large number of our clientele:
RMD & IRA Contribution Changes
Effective starting in 2020, the SECURE Act has changed the age that account holders must make Required Minimum Distributions (RMDs) from 70.5 to 72. Those who have reached the age of 70.5 at any point in 2019 must still withdraw an RMD, or they will be hit with penalties. The change allows taxpayers to defer paying taxes and let the funds in their retirement accounts grow for a couple more years before making withdrawals. Additionally, the age restriction for traditional IRA contributions has been removed. This was previously capped at the age of 70.5 as well (Roth IRAs, which do not necessitate RMDs, had no age limitation on contributions prior to the Act, and still have no such restriction). This allows for a greater number of contributions to be made, aiding the many Americans who continue to work past the traditional retirement age. Please note that the deadline for making IRA retirement contributions for your 2019 tax year is April 15, 2020!
Small Business Plans & Credits
In order to encourage people to save for retirement, the legislation provides for a new credit available to employers. Small businesses that automatically enroll their employees in retirement plans will get a tax credit to offset their associated costs. It’s important to note this credit is in addition to the start-up credit already available, which the SECURE Act has increased as well. Small businesses may also want to take advantage of the Act’s Multiple Employer Plan (MEP). This plan allows multiple companies to pool retirement funds, resulting in an economical, and more easily manageable 401(k) plan.
Change to Inherited IRAs
One of the more controversial sections of the SECURE Act is the change to inherited IRAs, effective in 2020. Unless the beneficiary of the IRA is a surviving spouse, a minor child (until the age of majority), is no more than 10 years younger than the deceased, or is disabled, all of the funds within the inherited account must be distributed within 10 years of the date of death of the account owner. Prior to the Act, the inherited beneficiary could make distributions over their life expectancy, which, for inheritors of traditional IRAs, could potentially stretch their tax liability across several decades. Now, taxpayers who inherit large traditional IRAs will be burdened with distributing the entire balance of the retirement account over, most likely, a shorter period of time, taxed at their marginal rates. This creates an issue for certain taxpayers who may inherit these IRAs during their peak earning years, thus causing the distributions to be taxed at their highest possible rates.
The passage of the SECURE Act may make you want to rethink your retirement saving strategy. Give us a call if you have any questions or concerns and we’d be happy to assist you.
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