On Dec. 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act. The act is considered the most impactful legislation affecting individual retirement accounts in decades; it has many changes pertaining to small business owners, IRA holders and IRA beneficiaries.
Changes for small businesses
The act is intended to make it easier for small business owners to offer retirement planning to its employees. Among its many provisions, the act allows small businesses to band together to offer retirement plans, known as Multiple Employer Plans. MEPs allow small businesses to pool resources so that they may offer a workplace retirement plan that is cost effective and easy to administer.
The SECURE Act also provides favorable tax treatment for small businesses. The act includes a $5,000 tax credit for small businesses establishing a retirement plan for three years, and small businesses that adopt an automatic enrollment provision in their retirement plans receive an additional $500 tax credit. There are other provisions that follow this theme: Options for more employers and employees to plan for retirement. Small business employers who do not currently offer retirement plans should meet with their accounting, tax and finance advisors and evaluate whether retirement plans are viable and attractive options.
Changes to IRAs and beneficiaries
The act also has many provisions for IRA owners. It adjusts the law to allow for longer periods of employment and a longer life. However, the act negatively impacts the distribution of an IRA upon the death of the account holder and makes it a less attractive tool for inheritance.
The act increases the required beginning date for required minimum distributions from 70.5 to 72. Correspondingly, it eliminates the age restriction for contributions to qualified retirement accounts. This change allows account holders to contribute to their IRAs even after they turn 70.5 as long as the contributed funds come from earned income and not investments or savings.
Significantly, the SECURE act requires most designated beneficiaries of IRAs to withdraw the entire balance of an inherited IRA within 10 years of the account owner’s death, and within five years for estates and charities. There are a few exceptions to the new withdrawal period: Spouses, beneficiaries who are not more than 10 years younger than the account owner, the account owner’s minor children, disabled individuals and chronically ill individuals. With this change the act largely serves to provide an estimated $15.7 billion in tax revenue over the next 10 years.
Previously, if an account owner passed with assets remaining in the IRA, the beneficiary of the IRA could “stretch” the distribution over the course of the beneficiary’s lifetime. This stretch minimized the tax implication for the IRA distribution and allowed beneficiaries to grow their own IRA by rolling over the inherited IRA into their own personal IRA.
However, the new mandatory 10-year withdrawal period removes the ability for beneficiaries to stretch the IRA. The shorter withdrawal period will result in the acceleration of income tax due, possibly at times when a beneficiary’s taxable income and marginal tax rate is higher, thus receiving less of the funds contained in the IRA than may have originally been anticipated.
Depending on the value of the IRA and intended distribution and beneficiaries, IRA owners may need to revisit their IRA beneficiary designations and estate plans. If you are concerned about the tax or financial impact of the changes to RMDs, you should explore different strategies with your financial, tax and estate planning advisors. JN
Allison L. Kierman is the managing partner of Kierman Law, PLC, an Arizona estate planning law firm based in Scottsdale. She is also on the board of directors for Congregation Beth Israel and the youth board of directors for the Martin Pear Jewish Community Center.