Updated May 2023, this article was first published on February 26, 2020.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law December 20, 2019 and went into effect January 1, 2020. The new act affected everyone as the federal government strives to incentivize Americans to plan for their retirement and increase access to workplace plans. The most immediate impact at the time was felt not so much by young workers as much as by those nearing retirement. The latest regulations have a broader impact on the workforce regardless of age.
Below are updated details of the SECURE Act revision enacted for 2023 and what it can mean for your retirement plans or options. As always, it is most beneficial to speak with an experienced financial consultant who can help clarify every part of the SECURE Act and how it relates to your financial plans. If you are local to Winchester, VA, John Clawson is a well-rounded financial advisor who can assist in maximizing the retirement regulations to further your financial goals.
Modified rules to the IRA Required Distributions
Traditionally, if you had money in an Individual Retirement Account (IRA) or an employer sponsored retirement plan, you were required to start making withdrawals (Required Minimum Distribution or RMD) beginning at 70 1/2 years old. The original SECURE Act changed that requirement to 72 years of age. The most recent changes enacted in 2023 are designed to increase the age requirement for RMDs to 73 in 2023 and 75 in 2033. Known also as SECURE 2.0, the revised act does reduce the penalty tax for failures to take an RMD.
In addition, catch-up contribution amounts are set to increase for individuals between the ages of 60 and 63. There is a new requirement, as well, for catch-up contributions made by individuals earning over $145,000 to be made on a Roth, or after tax, basis.
Regarding penalty taxes, SECURE 2.0 reduces the penalty tax for failures by an individual to take the minimum distribution from 50% to 25%. If the failure is corrected in a timely manner, the excise tax is reduced from 25% to 10%. The self-correction rules were established under the IRS’s Employee Plans Compliance Resolution System (EPCRS).
Changes to the “stretching” of inherited IRAs and 401(k)s
Another area that has seen changes through the SECURE Act is to the “stretch” provisions for beneficiaries of IRAs and defined contribution plans, like 401(k)s. Typically, if a traditional IRA was left to a beneficiary, that person could stretch out the RMDs over his or her own life expectancy, thus “stretching” out the tax benefits of the retirement account. As of January 1st, 2020, most IRA beneficiaries will now have to distribute their entire inherited retirement account within 10 years of the year of the death of the original owner. There are a few exceptions to this rule. Surviving spouses, children (minors), disabled individuals, and those not more than 10 years younger than the deceased.
However, if you have already inherited a “stretch” IRA, the changes listed here only apply to the beneficiaries of someone who died after the end of 2019. It is important to make sure you take account and review the beneficiary designations of your retirement account to align with the new beneficiary rules. This is another area where it would help to speak with a financial planner who can help tailor the changes from the SECURE Act to your financial and retirement needs.
Increased options in small business retirement plans
The SECURE Act is not only making changes that impact those close to or already in retirement. It also gives tax incentives to small business owners to set up automatic enrollment in retirement plans for their employees. The Act allows multiple small businesses to band together with other companies to offer Multiple Employer Plans (MEP)—retirement savings accounts to employees who did not have the option in the first place. The SECURE Act also allows more part-timers to take advantage of employer sponsored retirement plans as well.
All in all, the Setting Every Community Up for Retirement Enhancement Act has put into place a number of provisions intended to help strengthen retirement security. To use these new options to help improve your own retirement plan, John Clawson offers a complimentary, no obligation, financial review to discuss your retirement options.
Read more about the SECURE Act 2.0. Resource materials include:
- SECURE Act House Resolution 2954 (aka Secure 2.0): https://www.congress.gov/bill/117th-congress/house-bill/2954/text
- LPL Financial Newsroom: https://www.lpl.com/newsroom/read/insider-blog-top-10-provisions-in-the-new-secure -2-act.html
- SECURE Act House Bill 2019 (original): https://www.congress.gov/bill/116th-congress/house-bill/1007
- Market Watch, The SECURE Act is changing retirement — here are the most important things to know: https://www.marketwatch.com/story/with-president-trumps-signature-the-secure-act-is-passed-here-are-the-most-important-things-to-know-2019-12-21
- Forbes, 6 Ways The SECURE Act May Impact Your Retirement: https://www.forbes.com/sites/nextavenue/2020/12/31/6-ways-the-secure-act-may-impact-your-retirement/#1bbdeaa8672a
- Forbes, Four Major Highlights Of The SECURE Act:https://www.forbes.com/sites/davidkudla/2020/01/10/four-major-highlights-of-the-secure-act/#5acdd18876b1
*Shenandoah Valley Financial Services is located in the city of Winchester in Frederick County, VA. We serve as financial advisors to clients in the Mid-Atlantic Region primarily in the states of VA, MD, DC, FL, NC, SC, PA, and WV.
This is meant for educational purposes only. It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Please consult with your financial professionals regarding your personal situation prior to making any financial related decisions. Waddell & Reed and its representatives do not offer tax or legal advice. 02/20