Article: SECURE Act Impact on Retirement Plan and Estate Plan

SECURE Act Impact on Retirement Plan and Estate Plan: by Syed Nishat & Aadil Zaman

The Setting Every Community Up for Retirement Enhancement {SECURE) Act has made some policy changes that will help you on your journey to a better future. SECURE Act was signed into law in December of 2019 and has taken effect as of January 1, 2020. This impacts defined contribution (DC) plans, defined benefit (DB) plans, individual retirement accounts (IRAs), and 529s. Here are some changes to keep in mind as you make any financial decisions.

• Required Minimum Distributions (RMDs)

Pre-SECURE Act, the age at which you must begin withdrawing minimum distributions from traditional IRAs and employer tax-deferred accounts such as 401(k), 403(b), or 457 was 70 ½. As of January 1, 2020 that has changed to 72. There are some caveats. If you turned 70 ½ in 2019 (born on or before 7/1/1949) you must take your RMD for 2019 by April of this year. If you are currently receiving (or should be) and are over 70 ½, you must continue receiving your RMDs. If you turn 70 ½ in 2020 or later (born after 7/1/1949), you can wait until you are 72 before withdrawing RMDs. This allows people to save for a longer period which is important as we are working and living longer. Speak to your financial advisor about any and all changes.

• Contributions to Traditional IRA after 70 ½

Beginning in the 2020 tax-year, you can contribute to a traditional IRA in the year you turn 70 ½ and beyond if you are working and earning income. This applies even if you have never made contributions before. There is no longer an age limit. However, you cannot make any contributions for 2019 if you are already over 70 ½. Seek advice from a financial advisor about how you can prepare for your future.

“Back door Roth IRA is an excellent strategy for people over 70 ½ now,” said Syed Nishat, Senior Partner at Wall Street Alliance Group. “You can contribute in a post-tax IRA account and convert it into a ROTH IRA without incurring any penalty and taxes.”

• Death of An Account Owner

Previously, non-spouse beneficiaries could “stretch” or extend RMDs from inherited accounts, ultimately allowing funds to grow tax-free. With the new legislation, in the instance of a deceased account owner, distributions to non-spouse beneficiaries must be made within 10 years. This applies to inherited funds in 401(k) and other DC plans. As with all good legislation, there are exceptions to the rule. The 10-year draw down does not apply to beneficiaries if they are a spouse, disabled or chronically ill, persons less than 10 years younger than the account owner, and minors until they reach the age of majority. If you have already inherited funds from a DC plan then this rule does not apply to you; it does apply to inherited funds received from deaths occurring after 2019. Consult with a financial advisor who can help you through this difficult time as this will change your retirement/estate planning strategies.

This can create a huge tax burden as the beneficiary has to take the distribution within 10 years. “It’s important to speak to a financial advisor who can review your Trust document to address this issue,” said Syed Nishat.  One possible solution could be to buy additional life insurance or use the funds during life time. “Clients should also take a look at Charitable Lead Trust,” said Aadil Zaman, partner at Wall Street Alliance Group. The charitable lead trust is a great way to get the funds back to your estate after certain period and it can save you a substantial amount of taxes.

• Qualified Adoption or Birth Distribution

Congratulations it’s a penalty-free withdrawal from a DC plan or IRA! Parents-to-be can now receive a distribution from a DC plan or IRA for adoptions or births. Each parent can withdraw $5,000 penalty-free ($10,000 per couple). Keep in mind, each parent must have a separate account in their name to make two withdrawals. Withdrawals must be made within one year of adoption finalization or birth. You can recontribute funds back into the retirement plan later and it will be treated as a rollover and not included in your taxable income. Talk to your financial advisor about how to best plan for your new family’s future.

• 529

The SECURE Act has expanded the definition of tax-free or qualified distribution for 529 to now include repayment up to $10,000. This applies to pay qualified student loans and/or certain apprenticeship programs. The $10,000 cap is for life, it is not annual. The policy is retroactive and dates back to 12/31/2018. Grants, fellowships, stipends and other funds for graduate or post-doctoral study and research are treated as income and can be used to contribute to retirement plans.

• Potential for More Lifetime Income Products (Annuities) in Retirement Plans.

The SECURE Act states that annuities can now be included in retirement plans. Previously, employers were hesitant on choosing insurance companies that provide annuities for liability reasons. With the new policy, employers are provided with immunity given they choose companies that meet certain criteria. Also with the new policy, annuities can move between retirement plans without charges and fees. Additionally, employers must now provide disclosures about how a participant’s retirement savings might change if they were to invest in a lifetime income product such as annuities. DC plans must disclose a “lifetime income stream equivalent.” For example, you would see an estimate of a monthly amount you could receive from a single or joint annuity based on your current IRA balance. The change has not taken effect yet so check with your financial advisor for all your options.

• Long-Term Part-Time Worker Access to Employer-Sponsored Retirement Plans

Before the SECURE Act, employers were not required to offer participation in sponsored plans to employees working less than 1,000 hours per year (19 hours per week).  For plan years beginning after 12/31/2020, employers must permit employees, who are at least age 21 and work 1,000 hours per year for one year or 500 hours per year (9.5 hours per week) for three years, to make salary deferrals to the plan.   As long as these employees work less than 1,000 hours per year, they may be excluded from employer contributions and non-discrimination tests.  Since SECURE Act permits plans to ignore years of service before 1/1/2021 for the 3-year period purposes, no employee will need to be permitted to defer under this provision before 2024.

• Increase in Maximum Contribution Rate

There is now an increase of the maximum contribution rate in auto-enrollment retirement plans. Before, employers were unable to set qualified automatic contribution arrangements (QACA) past 10%. The cap is now set to 15%. With QACAs, an employer can set a default contribution rate. The employee can then change the rate or accept the default. If the default is chosen the contribution will automatically increase until the new cap of 15% is reached. Speak to your financial advisor about the best contribution rate for you.

• Extended Adoption Deadline for New Plans:

Effective for plan years beginning after 12/31/19, the SECURE Act will extend the period of time for companies to adopt new plans beyond the end of the year to the due date for filing the company tax return, including extensions.  The additional time to establish a plan provides flexibility for employers that are considering adopting a plan and the opportunity for employees to receive contributions for that earlier year.    This applies only to employer contributions; deferral provisions must be adopted before the plan accepts elective deferrals.

• Small Employer Automatic Enrollment Credit

To encourage small business employers to become plan sponsors by defraying startup costs for new plans, the SECURE Act increases the business tax credit for Plan Start-up to the greater of (a) $500; or (b) the lesser of (i) $250 per non-highly compensated employee eligible to participate; or (ii) $5,000.  The credit applies for 3 years and is effective for tax years after 12/31/19. 

To encourage small-business owners to adopt automatic enrollment, it also provides a credit of $500 per year for 3 years for plans that add auto-enrollment of new hires.

About Wall Street Alliance Group- Wall Street Alliance Group is a nationally recognized wealth management firm headquartered in Manhattan, New York. The firm operates on a Fiduciary capacity serving high net worth clients and is on a mission to empower first-generation immigrants achieve financial well-being. Wall Street Alliance has a team of advisors with expertise in areas such as Tax Planning, Estate Planning, Asset Protection, Portfolio Management, 401(k) plans, Defined Benefit plans, Special Needs planning, Physician Financial planning and Trust services. Please visit www.wallstreetag.com.

Securities offered through Securities America, Inc., member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. Wall Street Alliance Group and Securities America are separate companies. They are independently owned and operated.