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Tom Jaracz: What you need to know about the SECURE ACT; review your retirement plan now

The Setting Every Community Up for Retirement Enhancement ACT or SECURE ACT, for short, was passed by the House in the summer of 2019 and the Senate near the middle of December. This act was part of The Further Consolidated Appropriations Act, 2020 which was signed by President Trump on December 20, 2019. The SECURE ACT includes policy changes that impact various tax-deferred accounts, while also increasing access to workplace plans.

Changes & Takeaways:

Traditional IRA contributions are allowed beyond 70½.

• As life expectancy is increasing so generally is the age at which people retire. Removing the age at which someone can contribute to a Traditional IRA, assuming they have earned income, more aligns these vehicles with 401(k) plans and Roth IRAs.

Required Distributions starting at 72 instead of 70½.

• This change seemingly piggybacks off removing the age limitation to contribute to an IRA. With Americans working and living longer, this allows for longer potential tax-deferred growth of qualified accounts. At this point, there hasn’t been much guidance from the IRS on what do to if you turned 70 ½ in 2019. Generally, it is suggested to continue taking your required minimum distribution.

Permits 401(k) plan sponsors to add annuities as investment options.

• The addition of annuities to 401(k) plans should make those plans feel pension-like (despite the disappearance of pensions in the private sector). For retirees concerned about outliving their income, this may protect them.

Birth and Adoption are now qualified expenses.

• Up to $5,000 can be withdrawn from retirement accounts without a 10% penalty.
• The distribution must come from a defined contribution plan such as a 401(k) or IRA, for example.
• We are waiting for more guidance from the IRS on payback options.

529 plans can now be used to pay student loan debt.

• Unused balances in 529’s can be used towards up to $10,000 in student debt during that student’s lifetime.
• The use of 529 assets has been expanded to include some apprenticeship programs

Allows part-time workers to participate in 401(k) plans.

• Working less than 1,000 hours per year meant you were ineligible to participate in your company’s plan.
• The SECURE ACT now requires eligibility to anyone who worked over 1,000 hours in one year or has worked over 500 hours consecutively for 3 years.

Incentivizes/makes it easier for small businesses to establish retirement benefits.

• Small businesses can receive a tax credit for up to $5,000 for starting a plan
• This applies to SEP, SIMPLE, 401(k), and Profit-Sharing Plans in companies of 100 employees or less.
• The credit is applied as $250 for every non highly compensated employee eligible to participant in a workplace plan (minimum credit $500).
• The new law allows small businesses to pool their plans in what are called multiple employer plans (MEPs). This will be available in 2021 and is supposed to be an easier, more cost-efficient solution to provide employees of small businesses access to a retirement savings vehicle.

Removal of IRA “Stretch” provision.

• In the past, a non-spouse beneficiary of a defined contribution plan such as a 401(k) or IRA was able to “stretch” the distributions out over their life expectancy (if you are in pay under an Inherited IRA you can stretch – the rule applies to deaths after 2019).
• As of January 1, 2020, non-spouse beneficiaries must withdraw the balance of those plans over the course of 10 years. Distributions do not need to be made each year.
• There are exemptions to this. For example, minor children up to the age of majority and the chronically ill are exempt. In summary, many beneficiaries will see increased taxes (due to larger distributions) and shorter distribution periods.
• The removal of the stretch provision makes it especially important to review beneficiary designations, as well as any estate planning documents you may have. If your plan is to leave behind a qualified account, it must be done in an efficient manner, and it must fulfill your objective.

Like most changes, the full impact of the SECURE ACT won’t be felt for some time. But the time to review your plan is now. Considering that most of these changes involve long term financial and tax planning strategies, it is important to discuss them with a professional who can tell you what’s best for you.

Tom Jaracz, CFP®, is a Junior Partner at the Premier Planning Group LLC. The Premier Planning Group is a dynamic, holistic, and independent financial planning firm serving the Greater Cincinnati area and beyond. Tom is responsible for creating financial plans and developing investment strategies for his clients. Representatives offer products and services using the following business names: Premier Planning Group, LLC – insurance and financial services | Ameritas Investment Company, LLC (AIC), Member  FINRA/ SIPC  – securities and investments/ Ameritas Advisory Services (AAS) – investment advisory services. AIC and AAS are not affiliated with Premier Planning Group, LLC. Representatives of AIC and AAS do not provide tax or legal advice. Please consult your tax advisor or attorney regarding your situation. 

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