The retirement industry has had technical laws and rules in place for many years. The Setting Every Community Up for Retirement Enhancement Act of 2019, aka the SECURE Act, is going to be making changes to this. In this article, I will cover how these changes, both big and small, have the potential to affect U.S. citizens.
Biggest changes
The biggest change is that employees no longer have to begin drawing money out at age 70 1/2. The new age is 72. The 70 1/2 rule began in the 1960s when life expectancy was shorter. Also, employees over age 70 1/2 can continue to make contributions.
529 plans now may be used for "...costs associated with registered apprenticeships; homeschooling; up to $10,000 of qualified student loan repayments (including those for siblings); and private elementary, secondary, or religious schools."
Inherited IRAs, for non-spouses, are now expected to deplete IRAs within ten years. This is a big change. If you have inherited an IRA from a non-spouse, then you know that you must take annual distributions. These distributions are now larger and will greatly add to your tax bill, unless they are a Roth.
Participants are now allowed to withdraw, penalty free, for pregnancy expenses. "The legislation provides for penalty-free withdrawals from retirement plans for any “qualified birth or adoption distributions.”" Participants will still have to pay taxes on these distributions, just not penalties.
Plan sponsors now must add on participant statements what a lifetime stream of cash would be if the participant annuitized their retirement plan:
"The legislation requires benefit statements provided to defined contribution plan participants to include a lifetime income disclosure at least once during any 12-month period. The disclosure would illustrate the monthly payments the participant would receive if the total account balance were used to provide lifetime income streams, including a qualified joint and survivor annuity for the participant and the participant’s surviving spouse and a single life annuity."
Stipends and non-tuition fellowship payments received by graduate and postdoctoral students are not treated as compensation and cannot be used as the basis for IRA contributions. The legislation removes this obstacle to retirement savings by taking such amounts that are includible in income into account for IRA contribution purposes. The change will enable these students to begin saving for retirement and accumulating tax-favored retirement savings.
Safe Harbor rules for 401Ks
The act includes several changes about Safe Harbor rules for 401Ks. One is that the cap has been raised from 10% of earnings to 15%. There are also technical changes about when and how employers and employees can make changes.
Small businesses are incentivized to start 401Ks. The legislation increases the credit by changing the calculation of the flat dollar amount limit on the credit to the greater of (1) $500 or (2) the lesser of (A) $250 multiplied by the number of non-highly compensated employees of the eligible employer who are eligible to participate in the plan or (B) $5,000. The credit applies for up to three years. The legislation creates a new tax credit of up to $500 per year to employers to defray startup costs for new section 401(K) plans and simple IRA plans that include automatic enrollment.
Technical changes for certain industries
There are also other very technical changes for certain industries. One is for community newspapers. "This provision provides pension funding relief for community newspaper plan sponsors by increasing the interest rate to calculate those funding obligations to 8%. Additionally, this bill provides for a longer amortization period of 30 years from 7 years."
Other changes also account for churches, part time employees, volunteer firefighters and home healthcare employees. Basically, many of these people do not earn a lot of money and have been excluded from retirement plans, but the SECURE Act aims to put at stop to that.
Other technical changes are about filing dates, penalties for not filing with the Department of Labor and penalties for not filing with the IRS.
The biggest changes have to do with lifetime income options. The industry thinks that whole life insurance will become more popular because beneficiaries will not be forced to take withdrawals as with inherited IRAs. Another industry that could do well is the annuity industry, as it seems that the new laws encourage people to take streams of income.
Disclosure: We don't own stock of the companies mentioned.
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