02 Apr What Is the SECURE Act and How Will It Impact Your Retirement?
The Setting Every Community Up for Retirement Enhancement (or SECURE) Act was signed into law on December 20, 2019, and went into effect at the beginning of this year. This act was designed to assist Americans in preparing and saving for retirement, and many of the changes it implements may impact how you plan and prepare for your retirement. This article will go over some of the main points of the SECURE Act, but if you have any questions about how these changes will impact you, contact one of our accountants in Provo.
Eliminated Age Cap on Contributions
Previously, you could only contribute to your IRA until the age of 70 ½. The SECURE Act has eliminated this age cap, and you can continue to make contributions so long as you have earned income. As Americans are working later and later into their lives, this change enables older individuals to continue saving so long as they are employed.
Delayed Required Minimum Distributions
Under the previous laws, individuals were required to begin taking a minimum annual distribution from their retirement accounts starting at the age of 70 ½. The SECURE Act pushes back these required minimum distributions (RMDs) to the age of 72. Of course, if you wish to begin taking distributions earlier, you still can. They’re simply no longer required.
This change only applies to those who will turn 70 ½ this year or later on (more specifically, those born on or after July 1, 1949). If you were born before this date, the previous age requirement still applies to you. The delayed RMD requirement applies to traditional IRAs, 401(k)s, 403(b)s, 457s, and other employer tax-deferred retirement accounts.
Eliminated “Stretching” Inherited IRAs
In the past, certain provisions regarding inherited IRAs would enable beneficiaries to “stretch” the minimum distributions over their own lifetime. This often allowed the IRA funds to continue growing tax-free for decades. The provisions that permitted this have now been eliminated under the SECURE Act for 401(k)s, IRAs, and other defined contribution plans.
Under the new laws, distributions to a non-spouse beneficiary must be made within 10 years of inheriting the account. The SECURE Act does make exceptions for spouses, disabled individuals, and certain other kinds of beneficiaries. Additionally, minor children inheriting a retirement plan are exempt from the 10-year rule until they come of age.
If you already have an inherited IRA, you don’t have to worry about these changes; your inherited account is grandfathered into the old provisions.
Tax Credit for Small Employer Retirement Plans
It has often been a struggle for small-business owners to provide retirement plans for their employees due to the expenses associated with it. This often made it difficult for them to compete for top talent against larger companies offering more benefits. The SECURE Act aims to level this playing field by providing a tax credit to small employers (those with fewer than 100 employees) who provide this benefit.
Through the SECURE Act, small-business owners can receive $250 per non-highly compensated employee who is eligible to participate in the retirement plan. The minimum credit for this program is $500, with a maximum credit of $5,000. For retirement plans that include automatic enrollment, employers can receive an additional credit of $500. Eligible retirement plan types include SEP, SIMPLE, 401(k), and profit-sharing plans.
Eligibility for Part-Time Employees
The SECURE Act also makes it possible for long-term part-time employees to qualify for employer-sponsored retirement plans. Now, employers that offer a 401(k) plan are required to offer the benefit to not only employees who work more than 1,000 hours in a year, but also to those who work more than 500 hours over 3 consecutive years.
If you have any questions or concerns regarding how the SECURE Act impacts your retirement plans or your business, contact The Accounting Guys today. We’ll go over these changes with you and ensure that you’re set up for your retirement. Give us a call to schedule an appointment with one of our accountants in Provo.