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How the SECURE Act Changed Retirement Plans

13 July 2022

We first wrote about the significant changes to retirement plans made by the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), in January of 2020 – shortly after its effective date of January 1 of that year.

But we think now is a good time to revisit the Act’s changes, especially since the promised follow-up bill, the Securing a Strong Retirement Act (SECURE 2.0) has passed the U.S. House of Representatives, and the U.S. Senate has prepared their own version in two bills which have passed in committee.

  • 401(k)s: Before the SECURE Act, employees had to work a minimum of 1,000 hours annually to be eligible for 401(k) participation. The SECURE Act allows participation if an employee has worked 500 hours annually for three years running. In addition, the Act makes it simpler for employers to adopt a Safe Harbor 401(k) Plan – Safe Harbor plans are more economical to administrate.
  • IRA Contributions: Prior to the SECURE Act, taxpayers were not allowed to contribute to an IRA after reaching the age of 70½. The SECURE Act repealed this restriction. Now, as long as you are working, your can contribute to your IRA – even if you’re 85 years young.
  • Required Minimum Distributions (RMDs): Previous rules required those with qualified retirement plans (IRAs, 401(k)s, etc.) to begin taking RMDs in the year after they reached the age of 70½. Under the SECURE Act, the age at which RMDs must be taken was extended to 72, taking increases in longevity into account.
  • Early Withdrawals: The SECURE Act legislation added additional categories of eligible expenses to the list of reasons for early withdrawals from qualified retirement plans which will not be subject to the 10% penalty, though if your plan contributions are pre-tax, you will incur income tax liability. The additions include qualified birth or adoption expenses.
  • Stretch IRAs: If the above provisions are ointment, this is the fly. Because this provision is what pays for the others, and likely has already an adverse impact on many taxpayers. Before the SECURE Act, beneficiaries of inherited IRAs were permitted to take extended RMDs over the course of their lifetimes. Under the SECURE Act, non-spousal beneficiaries of all inherited IRAs and qualified plans must take full distribution of these accounts within ten years following the death of the account owner. There are some exceptions – if the beneficiary is a minor, disabled, chronically ill, or no more than ten years younger than the deceased account owner.

 

These were only a few of the provisions of the SECURE Act; many other significant changes to previous law were incorporated.

Now, what further changes may be coming with SECURE 2.0, if it becomes law? We have the House bill to guide our thinking at present, but some highlights of that bill include:

  • RMDs: RMDs would become mandatory at age 73 as of January 1, 2023 (assuming some version of SECURE 2.0 passes the Senate and is signed into law), at age 74 as of January 1, 2030, rising to the final age of 75 as of January 1, 2033. In addition, the SECURE Act left unchanged the 50% excise tax on RMDs not (or not fully) taken. SECURE 2.0 would reduce that penalty to 25%.
  • 401(k)s and 403(b)s: SECURE 2.0 would require employers to automatically enroll eligible employees in their qualified retirement plans at a contribution level of 3% of salary. Employees would be able to opt out, contribute less, or contribute more – up to annual contribution limits, which for 2022 is $20,500 for traditional and Safe Harbor 401(k) plans, and $6,000 for IRAs, with additional “catch-up” contributions permitted for those age 50 and older. These “catch-up” contributions are capped at $6,500 for 401(k) and 403(b) plans, and $3,000 for SIMPLE IRAs. SECURE 2.0 will increase the allowable “catch-up” limits for participants age 62, 63, or 64, up to $10,000 for 401(k) and 403(b) plans, and up to $5,000 for SIMPLE IRAs.
  • Qualified Charitable Disbursements (QCDs): Those over age 70½ can, under current rules, transfer up to $100,000 annually from traditional IRAs directly to charity. Such transfers can be used to satisfy RMD requirements and do not add to the donor’s taxable income, though they cannot be claimed as a deduction on the donor’s income tax return. SECURE 2.0 would index the $100,000 annual limit to inflation, and would also allow a one-time QCD transfer via a charitable gift annuity of a charitable remainder trust.

Again, the above are only a few highlights of SECURE 2.0 – any or all or none of the House bill’s provisions may remain in any final bill, and few are likely to be unaltered over the course of the legislation’s progress.

If you would like to know more about the SECURE Act, the potential SECURE 2.0 Act, and how either or both might affect your own financial picture, please click here to email us directly – we are here to help.

Until next time –

Peace,

Eric

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