Bernadette Starzee, BridgeTower Media Newswires
A new law will have a significant impact on how Americans save for retirement.
President Donald Trump signed the bipartisan SECURE Act, which stands for “Setting Every Community Up for Retirement,” into law as part of the federal government’s year-end spending bill. The new law is widely considered the biggest piece of retirement legislation since the Pension Protection Act of 2006.
“The Act is designed to help Americans save more for retirement and to enable small employers to offer more retirement savings options,” said Lisa Rispoli, partner and trust and estate services leader at Grassi & Co., a public accounting firm based in Jericho.
The SECURE Act seeks to remove some of the hurdles that keep people from saving. It also makes it easier for small businesses to band together to offer retirement plans to their employees. In addition, the law opens the door for long-term part-time employees to gain access to workplace retirement plans.
In addition, the SECURE Act raises the age that Americans must start drawing from retirement savings, known as the required minimum distribution age, from 70.5 to 72, as people are living and working longer.
This change allows “tax-deferred savings to grow even longer,” said Rispoli, noting that this option is available to anyone who reaches the age of 70.5 after 2019.
The new law also provides more years for people to contribute to individual retirement accounts, for the same reason.
“Taxpayers who work past the age of 70.5 would be able to continue to contribute to IRAs,” Rispoli said, adding that this expands “the available retirement planning strategies later in life.”
Significantly, the law provides incentives for small employers to offer retirement plans to their employees.
“The Act allows small employers, who might not otherwise be able to offer retirement savings to employees, to join forces with other small employers to set up and offer a plan while incurring lower liability and costs,” Rispoli said.
In addition, a new tax credit of $500 is available for employers who offer automatic enrollment into retirement plans.
“The benefit is two-fold,” Rispoli said. “The credit could help offset some of the up-front costs for the employer, while automatic enrollment could increase employee participation.”
The SECURE Act creates new rules that could expand lifetime-income options within workplace plans, such as annuities. That’s aimed at helping people establish reliable streams of income in retirement. It also makes it easier for employees to transfer retirement plan assets when they change jobs.
The law also fixes a component of the 2017 tax overhaul that raised taxes on benefits received by family members of deceased military veterans, as well as taxes on some students and members of Native American tribes.
Another plus is that taxpayers can withdraw up to $5,000 from their retirement account for a qualified birth or adoption without having to fork over a 10 percent distribution penalty.
“Keep in mind that this withdrawal will still trigger a tax obligation, which could coincide with increased childcare costs and other expenses,” Rispoli said.
A negative feature of the SECURE Act, however, is that it is ending the ability for taxpayers to use stretch IRAs, a strategy that extends the tax-deferred status of an inherited IRA that is passed to a non-spouse beneficiary. Prior to the Secure Act, beneficiaries were allowed to stretch required minimum distributions over their lifetimes.
Now, “they will be required to take all required minimum distributions by the end of the 10th year after the trust owner’s death,” Rispoli said. “It is crucial to strategically plan for this change because it will force many beneficiaries of retirement plans and trusts to take required minimum distributions when they are in the highest tax brackets of their lives.”
“Pass-through” trusts that were created prior to the law will also need to be updated to conform to the SECURE Act language, or else risk restricted access to funds, Rispoli said. “Inherited IRAs that were already in existence in 2019 are exempt from the new law,” she added.
While most of the SECURE Act’s impacts will be positive, the new law “will trigger the need for many taxpayers to reassess their estate and retirement plans to ensure maximum benefit and minimal risk,” Rispoli said.
The Associated Press contributed to this article.
