The 2020 SECURE Act and Your Retirement

Signed by President Trump on December 20^th, the SECURE (Setting Every Community Up for Retirement Enhancement) Act is now the law of the land. Here are what we consider to be the important provisions that will affect retirement savers, retirees, and small business owners.

First, required minimum distributions from 401(k) plans and traditional IRAs will now begin at age 72 rather than 70¹/₂. This will provide a potential tax savings to investors who will turn 70¹/₂ after 12/31/2019.

Second, there are no longer age restrictions on contributions to a traditional IRA. If you have earned income, you may now contribute beyond age 70¹/₂, starting in the 2020 tax year.

Third, part-time employees can become eligible for their employer’s 401(k) plan. They will need to have worked 500 hours per year for at least three consecutive years.

Fourth, the 10% early withdrawal fee on IRAs and 401(k) accounts will be waived for the arrival of a new child (birth or adoption), up to $5,000. Federal income taxes will still be owed on the distribution unless the funds are repaid. The withdrawal must occur after the birth or adoption.

Fifth, it’s now easier for small businesses to offer retirement plans. Their potential tax credit for 50% of the start-up costs will be increased from $500 to $5,000. Additionally, there is a brand new $500 start-up tax credit for small business plans that include automatic enrollment.

Sixth, what Uncle Sam gives with one hand, he takes with the other. The downside of the SECURE Act is that inherited IRAs and 401(k) accounts (with a few exceptions) can no longer be stretched over the lifetime of a non-spouse beneficiary. They must be fully distributed within ten years of the account owner’s death. This will apply for all accounts where the owner dies after 12/31/2019, which undoubtedly will throw a monkey wrench into quite a few estate plans. Furthermore, estate plans that have a trust as an IRA beneficiary will need to be carefully reviewed. For those who inherit a Roth account, one can easily argue that the optimal strategy is to wait until the end of the ten-year period and withdraw the whole thing as a lump sum. For traditional accounts, the situation is more complicated, as a lump sum withdrawal may trigger a higher tax bracket.

As always, we at Clarity Capital Advisors are here to answer any questions you may have in the ever-changing financial landscape. Feel free to reach out to us at advisors@clarityca.com or call us at 800-345-4635.