While we were all busy shopping for the holidays, spending time with our families, and enjoying our New Year’s celebrations (not to mention, implementing our 2020 resolutions), Congress slipped a bill under our noses that caused a boat load of change.
The retirement savings bill, also known as the SECURE Act (Setting Every Community Up for Retirement) was part of a huge, 1,773-page bill passed as part of avoiding the government shut-down that would’ve taken place back on December 20th. Below is a list of things you need to know, including changes and provisions that were included in the bill:
Setting Up a 401(k) Plan for your Business is now Easier and Cheaper: In the past, it was cost prohibitive for small business to start up a 401(k) plan. Many of the options included large initiation fees, even bigger annual fees, and all while being forced into acting as a Fiduciary for your employees’ retirement accounts. Under the new law, we were able to more simply and efficiently set up a Multiple Employer Plan (or MEP for short), which allowed us to create a band of unrelated companies for the sake of cost savings (due to the larger “footprint” created), all while keeping their retirement plan assets completely separate. It also allowed us to remove a good portion of the Fiduciary responsibility from the business owner’s shoulders, while increasing the service they receive, all while reducing their administrative and investment costs.
Increasing the Required Minimum Distribution (RMD) age: In the past, the IRS required individuals to take a taxable distribution each year, starting in the year following the year they turned 70 ½ years of age. Going forward, for anyone who turn(ed) 70 ½ after December 31st, 2019, you will not be required to take your RMD’s until 72 years of age.
Traditional IRA Contributions after 70 ½: In the past, individuals were prohibited from making pre-tax (deductible) contributions to traditional IRA’s. Now, you can contribute at any age, as long as you have earned income.
Penalty Waiver for Birth or Adoption Expenses: This is a benefit that is similar to the first-time-homebuyer penalty waiver. Under the new law, parents can take up to $5,000 out of their IRA or retirement plan at work (i.e. – 401(k)) to pay for birth and adoption expenses, without incurring an early withdrawal penalty (normally 10%). This applies not only to the initial costs, but also to additional costs that take place throughout the first full year of the baby’s life. Withdrawals will still be subject to taxes (since the pre-tax retirement plans have never been taxed), but the penalty is waived.
Part-Timers Can Contribute to 401(k)’s: New for 2020, part-time employees are now eligible to contribute to their company’s 401(k) plan, assuming they’ve satisfied the prerequisite of working 500 hours-per-year, for three consecutive years.
It’s Easier to Pay Off School Loans: Going forward, College Savings 529 plans can now be used to pay off as much as $10,000 in student loans.
Inherited IRA Distribution Changes: In the past, inherited (also known as Decedent, “Legacy,” or “Stretch”) IRA’s were allowed to have distributions “stretched” over the lifetime of the person who inherited the account. Under the new law, for any IRA inherited by a non-spousal beneficiary in 2020 and beyond, the assets must be distributed over 10 years. This will result in higher forced withdrawals, which unfortunately for most individuals, will result in higher taxes.
Annuities in 401(k) Plans: While plans have never been required to include annuities, the new law now makes it easier for businesses to include them as an option. In my opinion, annuities inside 401(k) plans is a “thing of the past,” and was largely limited to educational institutions (such as elementary, middle, and high schools, as well as colleges and universities). Many annuities and those who sell them are not monitored by the securities regulators and thus, are often mis-sold for their high costs, high commissions, and long-standing penalties to get out of them.
The only topic of urgent nature relates to the change in RMD laws. If you turned 70 ½ prior to December 31st, 2019, make sure you take your RMD by April 1st in order to avoid the 50% IRS penalty! However, if you don’t turn 70 ½ until after New Year’s Day in 2020, then you don’t need to worry about your RMD’s until 2022.
Otherwise, if you’re a business owner and looking to get a second opinion on your 401(k), or maybe you’re looking to upgrade your SEP or SIMPLE IRA to something with a higher value, reach out and ask us about how a MEP or Group Plan might benefit your company.
Till next time…
AdamCategories: Adam Koos, CFP®, CMT®, Educational Articles