On Jan. 1, 2020, the Setting Every Community Up for Retirement Enhancement Act (or Secure Act) took effect, offering better opportunities for successful retirements across America. The benefits of the Secure Act include the following:
Retirees no longer have to take required minimum distributions (RMDs) from traditional IRAs or other retirement plans by April 1 following the year in which they turn 70.5 years old. The Secure Act requires RMDs to begin by April 1, following the year in which a retiree turns 72.
Individuals who choose to work beyond traditional retirement age can now contribute to a traditional IRA even after 70.5 years of age. Individuals can now take penalty-free early withdrawals of up to $5,000 from their qualified plans and IRAs due to the birth or adoption of a child (Note, ordinary income taxes still apply).
Part-time workers age 21 and older working at least 500 hours in three consecutive years generally must be allowed to participate in company retirement plans offering a qualified cash or deferred arrangement (Note, the new rule applies to plan years beginning on or after Jan. 1, 2021).
Individuals with high medical bills may be able to deduct unreimbursed expenses that exceed 7.5% (in 2019 and 2020) of their adjusted gross income. In addition, individuals may withdraw money from their qualified retirement plans and IRAs penalty-free to cover expenses that exceed this threshold (although regular income taxes will apply). The threshold returns to 10% in 2021.
529 Accounts can now be used to pay for student loans ($10,000 lifetime maximum).
Retirement plan sponsors are now required to provide annual statements estimating participant retirement plan assets expressed as monthly income received over a lifetime. This is intended to help participants determine their progress with retirement-income goals.
One key change to note is that non-spouse beneficiaries to an inherited IRA or retirement plan assets are no longer permitted to extend distributions over their lifetimes, i.e., stretch IRAs. Now any beneficiary who is more than 10 years younger than the account owner must liquidate the account within 10 years of the death of account owner, unless this person is a spouse, a disabled or chronically ill individual, or a minor child. Keep in mind this also affects IRA trust beneficiaries.
The Secure Act also benefits employers by providing a larger tax credit to small businesses for starting a retirement plan. Employers can now take a credit equal to the greater of 1) $500 or 2) the lessor of $250 X the number of non-highly compensated eligible employees or $5,000. The credit applies for up to 3 years. A $500 credit is also available to employers that set up a SIMPLE IRA or 401k plan with automatic enrollment. This credit also applies for three years.
Auto-enrollment safe harbor plans can now automatically increase participant contributions up to 15% of salary.
Sources: Broadridge Advisor Solutions and IRS