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The Secure Act:
The SECURE Act has wide-reaching impact
The “Setting Every Community Up for Retirement Security Act”, or SECURE Act, was signed into law on December 20th, after passing with bipartisan support (97% of the house, and 71% of the senate). Whether you are an employee with a 401(k) or a small business owner providing retirement benefit to employees, the SECURE Act will likely have an impact on your retirement planning and options. Below are just some of the highlights.
Required Minimum Distributions (RMDs) Age
We regularly encounter questions about the current age of 70½ for required minimum distributions (RMDs). The age, which may see somewhat arbitrary, and can be confusing to calculate when planning several retirement related decisions. The SECURE Act changes the RMD age to 72 which pushes the timeline further back and makes things a bit easier when it comes to calculating key retirement events.
No More “Stretch IRA” Benefits
Stretch IRAs are normal IRA accounts that employ a strategy that allowed investors to pass the IRA down to future (non-spouse) generations and affording those beneficiaries with a means of deferring taxes and achieving tax-free growth. They are called “stretch” IRAs because they could allow a young person inheriting the IRA to “stretch” out distributions over several decades.
With the SECURE Act those options and strategies are no longer available. Under the new law non-spouse beneficiaries must disbursements within 10 years (from the original account holder’s date of death) instead of allowing the beneficiary to take disbursements over their entire lifetime.
New Options for Business Owners and Their Employees
According to Callan Institute’s report on 2019 defined contribution trends, less than 10% of employer retirement benefit plans offer any sort of annuities or lifetime income options. Based on reporting from the Center for Retirement Research at Boston College, annuities typically have more complicated legal requirements and higher fee structures which makes them riskier for small business owners.
With the Secure Act now passed and signed into law, offering annuities may be of benefit to employees who prefer them, while reducing the overall risk of business owners being sued if the annuity should fail for some reason. Strong Valley can provide more information on why your business may (or may not) want to include annuities as part of the income solutions offered to your employees. Strong Valley can also provide information that may be helpful to employees in understanding whether annuities make sense for their retirement at all.
Multiple Employer Plans
Another aspect of the SECURE Act are new tax credits and potential cost savings for small businesses by allowing business owners to pool together to offer employees a retirement plan. These are called Multiple Employer Plans (MEPs) and they can reduce the administrative burden and costs associated with operating the retirement plans. Strong Valley works closely with business owners and has experience working with and managing small business retirement plans and can provide more information to business owners who want to strengthen their business and retirement options by extending retirement benefits to their employees.
Part-time Employee Access to Benefits
One of the other new changes to come from the Secure Act is providing access to retirement benefits for long-term part-time employees (those who work over 1000 hours per year, or for more than 500 hours over the past three years).
Of course, there are many more details of the SECURE Act, and there are many reasons for small business owners to offer retirement benefits to their employees. Strong Valley has experience in providing guidance and plan support for small business owners. With the passage of the SECURE Act, it may be a good time for our business clients schedule a meeting to review new options available.
Summary
There are some advantages and disadvantages to the SECURE Act. On the upside there are many advantages for small businesses owners who want to begin offering retirement benefits, and more options for those already offering retirement plans to their employees.
For individual and private investors, the most important thing to know is that the biggest tax implication is not for the original account holder, but for those who will be inheriting the IRA account in the future. For those who have been planning to use the Stretch IRA provisions, be sure to work with your advisor in making the necessary shifts in strategy for your specific situation.
