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The New SECURE Act, Explained

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Effective January 1, 2020, the SECURE Act ushers in a host of changes related to retirement accounts. Short for Setting Every Community Up for Retirement Enhancement, SECURE offers small businesses new incentives for setting up retirement accounts, changes rules for inherited accounts, and shifts the ages for required minimum distributions (RMD) and IRA contributions. To learn how these new laws may affect your financial situation, keep reading for a look at the details.


New Tax Incentives for Small Businesses


If you set up a SIMPLE IRA or a 401(k) for your employees, you already receive some tax benefits, but the new law increases these benefits, as long as your programs feature auto-enrollment. Research indicates workers are more likely to stay in plans with auto-enrollment than they are to join on their own — as a result, this set-up truly helps people to save for their retirement.


If you feel intimidated about starting your own retirement plan, you may want to check into multi-employer plans. This act contains provisions that allow small business owners to tap into retirement plans with other businesses. To learn how these accounts may benefit your business, you may want to contact a tax accountant.


Changes to Rules for Part-Time Employees


In the past, you did not have to invite employees who logged less than 1,000 hours per year into your retirement plans, but the SECURE Act changes this rule. Now, if an employee works 1,000 hours in a single year or at least 500 hours three years in a row, you must invite them to participate. Whether you have an existing retirement plan or hope to start one in response to the incentives created by the SECURE Act, you need to keep this update in mind.


No Maximum Age for IRA Contributions


Traditionally, you could not make IRA contributions after you reached 70.5 years, but under the new law, you can now continue to make contributions as long as you like. If you need an extra tax deduction or if you simply want to continue saving, you may want to consider making contributions well into your 70s and beyond.


Increased Age for RMDs


The new SECURE Act also changes the age for RMDs. Previously, you had to start taking RMDs the year you turned 70.5, but as this age was based on life expectancies in the 1960s, it has now been changed to 72. If you don't need the funds, you are no longer obligated to take withdrawals until you turn 72 years.


Note that if you turned 70.5 years in 2019, you are grandfathered in under the old rules. You must make a withdrawal for 2019 and for each of the following years. Luckily, you have a bit of extra time for the first year. If you were required to take your first minimum RMD in 2019, you have until April 1st, 2020. After the first year, you must take your RMD by December 31st of every year. If you fail to make a RMD, you face a penalty worth 50% of your RMD. In other words, if you're required to withdraw $10,000, but don't withdraw anything, you may face a $5,000 penalty.


Changes to Distributions on Inherited Retirement Accounts


The new SECURE act also changes the rules on distributions for retirement accounts inherited from anyone besides your spouse. Previously, you had the right to spread the distributions across your projected lifespan, but now, you must withdraw or transfer all the funds within 10 years. You don't have to withdraw any set amount each year, but you must ensure that everything is out of that account within 10 years.


This rule can bring in a new set of tax considerations, especially if you are in your 40s or 50s. If you have inherited a retirement account, a CPA can help you decide when to make withdrawals, and they can help you deal with the distributions in a way that minimizes your tax liability.


Whether you are a small business owner, someone who has inherited a retirement account, or anyone who wants to optimize your investment strategy from a tax perspective, you need the right help. To learn more about the new SECURE Act, contact us today. At Scott Boyar, CPA, we can help you plan for the tax implications of retirement.

Posted by Scott Boyar CPA


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