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How retirement reforms could change your investments

Posted at 5:08 PM, Jan 07, 2020

Major tax changes or retirement reforms only happen once every decade or so, but the passage of the SECURE Act marks the second big change in just a couple short years (the first being the Tax Cuts and Jobs Act, aka Trump tax reform).

Carl Carlson, CEO of Carlson Financial said one key change that he thinks most investors will want to be aware of – since it applies to everyone with an IRA – is the change of the age at which you must start taking Required Minimum Distributions, or RMDs. That age has long been 70.5, but now for those turning 70.5 after January 1, 2020, their required distribution age has been pushed back to 72.

That change will allow people to delay taking money out.

A drawback of the act is that it will change how most non-spouse beneficiaries will inherit an IRA, effectively ending what’s known as the “stretch IRA.” Previously, a non-spouse beneficiary was allowed to roll the inherited money into an inherited IRA of their own and begin taking RMDs based on their own life-expectancy. Going forward, the non-spouse beneficiary will be required to completely empty the account within 10 years, Carlson said. There will not be specific distribution requirements, like needing to take out a certain amount or percentage each year, but it must all be taken by the end of the 10th year after inheriting.

That could result in a lot more tax being owed, especially if the beneficiary is in their higher income-earning years. Carlson added, though there is still some room for planning since there is flexibility on when to take it within the 10 years. There are also some exceptions on who will be required to do this. Some might want to revisit their retirement or inheritance plans, to see how these changes may affect them.

The SECURE act contains a lot more changes than what we can cover so Carlson would encourage everyone at home to do some further research, but other changes that might interest individuals include:

  • A new exception to the 10% early withdrawal penalty. The exception will allow up to $5,000 to be taken out of an IRA without penalty as a “qualified birth or adoption distribution,” that must be taken within one year of when the birth happens or adoption is finalized.
  • The act also lifts the age restriction on contributing to a traditional IRA. Previously you could not contribute to an IRA if you were over 70.5, but now individuals of any age can contribute, provided they still have earned income.
  • Easier access to company retirement plans for part-time employees. In the past, an employer could exclude employees from the retirement plan if that employee did not work at least 1000 hours in the previous year. Now, if a worker has worked at least 500 hours per year for three consecutive years, they can contribute to the company employer plan.

Some key changes that employers will want to be aware of:

  • The obstacles to having a “Multiple Employer Retirement plan” have been significantly reduced. This is a type of retirement plan used by two or more unrelated companies to allow for economies of scale, or hopefully, lower costs of maintaining the plan. Additionally, small businesses can get a bigger tax credit for offering access to a retirement plan and a different tax credit for auto-enrollment in said plan
  • Employers who do auto-enroll their employees in the company retirement plan can increase the default percentage, up to 15% from 10%
  • Employers will also be able to offer lifetime income annuities as an investment option within their plan