You may be aware that on December 20, President Trump signed something called the SECURE Act (Setting Every Community Up for Retirement Enhancement) into law. But what does that mean for financial consumers? Among other things, the new law increases the tax credit for small businesses to set up new retirement plans for their employees, from $500 to $5,000. It allows small employers to automatically enroll their employees and allows smaller companies to create multiple employer plans with other companies in the area, reducing the obstacles to offering 401(k) and other retirement plans. A great deal of insurance industry lobbying support went into another provision that requires all qualified plans to show participants how they can convert their existing balances into “lifetime income” through an annuity.
Of more substance to many financial consumers is a plan to delay when we all have to take out required minimum distributions from our IRAs from the previous age 70 1/2 to age 72. Also of note, this law requires people who inherit IRAs to take the money out over a ten year period, instead of over their lifetimes (the so-called “stretch” provision). This has significant tax implications, since previously an IRA inheritor age 25 would only have to take out 1/58th of the money in that year, 1/57th the year after, and so forth for the rest of his/her life. Taking all the money from a large IRA out in the tenth year after inheritance could have potentially severe tax consequences on the unsuspecting inheritor.
Also, for people who are working past age 70 1/2, the SECURE Act allows them to contribute to an IRA. (They previously were not able to, but surprisingly, at that age they have been allowed to contribute to a Roth IRA and this will not change.) Plus, the law will allow families who adopt or have newborn children to take out up to $5,000 from their retirement plan without the usual 10% early distribution penalty.
In all, the SECURE Act has 29 new provisions or major changes in 20 sections. Financial planners will be studying these provisions and how they impact their clients, to see whether it changes their advice on tax and estate planning in the future.