The SECURE Act
The SECURE Act and how it may affect your retirement planning
AT THE END OF LAST YEAR, a new law took effect that was designed to increase access for more Americans to tax-advantaged accounts and prevent older Americans from outliving their assets. The Setting Every Community Up for Retirement Enhancement Act of 2019–a.k.a., the SECURE Act–was approved by the Senate on Dec. 19, 2019, and signed into law by President Trump the next day.
A little background
According to the U.S. Bureau of Labor and Statistics, only 55% of U.S. adults participate in a workplace retirement plan. Of those who do participate, many are falling short when it comes to the portion of their paychecks they should be investing. Vanguard, one of the world’s largest investment companies, for example, recently reported that the average 401(k) balance for those over age 65 was approximately $58,000.
The SECURE Act encourages employers who have previously shied away from offering these plans–which can be expensive to install and administer–to start offering them to part-time employees.
Key provisions of the act
The SECURE Act embodies several provisions which could affect our members and their retirement plans:
- It allows businesses to enroll part-time employees who work either 1,000 hours or more in a year or who have three consecutive years with 500 hours or more of service. This could be a huge advantage for anyone that might be working a part-time job by giving them the opportunity to contribute to an employer-sponsored 401(K) plan, whereas they couldn’t before.
- It encourages plan sponsors to include annuities as an option in workplace plans. (I personally like this one!)
- It changes the age at which retirement participants need to take required minimum distributions from age 70½ to 72 for those that are not 70 ½ by the end of 2019. (More on this later.)
The Stretch IRA is no more
One of the most significant changes in the new law that could impact a large number of our members at some time in the future is the elimination of the “Stretch IRA.” The Stretch IRA was a popular option with non-spouse beneficiaries which allowed them to “stretch” the required disbursements from an inherited IRA over their lifetimes, based on their own life expectancy. The difference in taxation of the Stretch IRA can be significant, especially for younger beneficiaries.
The new rule now requires full payout of the inherited IRA within 10 years of the death of the original account holder. The projected additional revenue generated from this change alone is an estimated $15.7 billion in additional tax dollars. (I told you the tax impact of the Stretch IRA was significant, didn’t I?)
This new rule does not apply to heirs of account holders who died prior to 2020. This change, coupled with the new rules for required minimum distributions (which I’ll discuss in the next paragraph) will probably have the largest impact on WPA members going forward.
New rules for required minimum distributions
Another significant impact of the SECURE Act is the new provision for required minimum distributions (RMD). The SECURE Act raised the required minimum distribution from qualified plans–such as IRAs, 401(k)s, etc.–from 70 ½ to 72. However, many financial institutions (such as WPA) were required to notify account owners who would be turning 70 ½ in 2020 of their RMD obligations by January 31, and many institutions sent their notices before the SECURE Act was passed.
Here at William Penn Association, we were fortunate enough to get the news in time and were able to pull all letters pertaining to any member who will be turning 70½ this year. Now, these members won’t be subject to the new RMD rules until the year in which they turn 72. By the way, I’d be remiss if I didn’t stress the work of our amazing Annuity Department in making this happen. Debbie Evans and Melissa Hickman always go above and beyond for our members behind the scenes here, and we certainly appreciate all of their hard work!
If you received an incorrect RMD letter from another company, you will be granted relief from the requirement provided you receive a corrected form by April 15, 2020. Corrected forms should notify you that no RMD is required for tax year 2020. Of course, those who turned 70 ½ prior to 2020, and are currently receiving RMD payments, will continue to have RMD obligations going forward.
Putting the SECURE Act to work for you
Perhaps you or a loved one are working part-time for an employer that will install a 401(k) plan. If so, take full advantage of that opportunity to put even a small percentage of your pay into a tax-advantaged basis. Even a small amount contributed on a regular basis can make a huge difference towards helping provide a more comfortable retirement. Also, be aware of the new Stretch IRA rules as well as the new RMD age requirement–both of these might have an impact on your plans now or at some time in the future.
Have you started your own plan towards your secure retirement? Will Social Security be enough when you retire? Are you taking full advantage of all of your available options?
You can open a William Penn Association annuity plan today for as little as $10 per month. And, 100% of your deposit–no matter how large or small–earns our high interest rates, currently 3.0% for our 5-year annuity and 3.5% for our 9-year annuity.
Why not call on your William Penn Association agent today? We can help you find a way to get started–or make more progress–towards your secure retirement. Don’t have an agent? Give us a call at the Home Office, and we’ll be glad to help!
Until next time, Happy Easter!