A recent study showed that retirement benefits ranked second in importance (after health care) among all the benefits that employers offer. The Q&A below represents a 100-mile-high view of the SECURE Act.
Some say the Act will greatly help Americans save more for retirement, and some say it is lackluster, designed mostly to benefit the government. The truth is for you to determine; the fact remains that Americans are poor savers and we all needed to be incentivized. If the past laws helped somewhat, then we’re hoping the new laws will help even more.
What is the purpose of the SECURE Act, in a nutshell?
The SECURE Act governs the rules for how we save for retirement and what we may do with the retirement funds. The SECURE Act is meant to be an incentive, helping Americans improve their retirement savings by creating more flexible rules for savings and use of funds.
From what accounts can I make a QCD? (QCD = Qualified Charitable Distribution, popularly called the Charitable IRA Rollover)
A QCD must come from traditional IRAs directly to charity. If you have other retirement assets such as a 401(k), 403(b), you must first roll those assets into an IRA, and then can make the direct transfer from the IRA directly to a nonprofit.
Has the minimum age for a QCD changed? I heard something about age 72.
The minimum age for a QCD remains the same: 70 ½. The RMD has gone up, to age 72. This is likely to confuse many, including your donors. (RMD = Required Minimum Distribution. It’s the amount you must withdraw from your retirement accounts each year.) This could be good for small business, as it may motivate some older employees to retire later — it is expensive to replace older, more experienced employees.
Where do RMD rules apply?
RMD rules apply to tax-deferred retirement accounts, such as:
- Traditional IRAs
- Rollover IRAs
- SIMPLE IRAs
- SEP IRAs
- Most small-business accounts
- Most 401(k) and 403(b) plans
What are the general benefits of the SECURE Act?
Depending on whom you ask, some of these may be considered benefits:
- The RMD age increased to age 72 from 70 ½. This increase gives taxpayers another 1 ½ years to defer withdrawals. This means you can potentially let your retirement funds grow an extra 1½ years before tapping into them. That can mean a significant boost to overall retirement savings for many seniors.
- You can contribute to a traditional IRA for as long as you live and work. Previously, the contribution cutoff was set to 70 ½. SECURE removes this restriction, because Americans are working and living longer. (Note: Roth IRAs never had an age/contribution restriction.)
- 401(k) opportunities for part-time employees. More part-time employees can qualify for 401(k) plans now, because the Act lowers the number of hours — from 1,000 to 500 — part-timers are required to work before qualifying for a 401(k). The employee must also have worked three years in a row.
- The contribution cap for auto-enrollment 401(k) plans and Simple IRAs jumps from 10 to 15%. If your employer-sponsored plan provides auto enrollment, the amount withheld for your savings can increase each year (unless you opt out), until it reaches 15% of your pay.
- Help for small business. Small businesses can “team up” to offer retirement plans; increased lifetime income offerings; new enrollment and tax changes to boost worker savings.
- Tax credits for small business. The new law also offers opportunities for tax credits for the start-up costs related to establishing an employer plan. There are also increased credits available for employers who require their workers to automatically enroll in their company’s retirement plans. This incentivizes small business to be more aggressive in hiring and retaining good employees.
- Annuity Option to Existing Plans. Before the law, withdrawals had to be taken in lump sums, and then taxed. Now, plan administrators can help retirees move their savings into investment vehicles/annuity plans that will pay them out for a longer period of time.
- More benefits under 529 Plans. These plans enable a tax-incentivized way for employees and their employers to put money away for their children’s (and other relatives) future higher-education expenses.
- No early withdrawal penalty for birth and adoption expenses. There are certain restrictions, but up to $5,000 ($10,000 for a married couple) can be withdrawn to assist with birth and adoption expenses without the early 10% withdrawal penalty. Of course, income tax will still be due on the account. (One can also put the money back into their retirement account at a later date. Recontributed amounts are treated as a rollover and not included in taxable income.)
- Disclosure statements after they stop working. Plan administrators are required to provide disclosure statements to plan participants, especially at or after retirement. These new statements will show projections for individuals should they choose to convert their plan to purchase an annuity.
- Help for graduate students and foster-care providers. Formerly, retirement plan contributions could not exceed the amount of your compensation — meaning if you didn’t work, you couldn’t make contributions. Under the SECURE Act, amounts paid to aid the pursuit of graduate or post-doctoral study or research (such as a fellowship, stipend or similar amount) are treated as compensation for the purposes of making retirement contributions. This will allow students to begin saving for retirement sooner. Similarly, “difficulty of care” payments to foster-care providers through state programs are also considered compensation under the Act for the purposes of 401(k) and IRA contribution requirements.
What are the concerns with this new plan/new rules?
- The end of “stretch” IRAs. The SECURE Act eliminates the “stretch” IRA plan that let non-spouse IRA beneficiaries to “stretch” required minimum distributions from an inherited account out over their life expectancy. The new law requires all funds from an inherited IRA, 401(k) or other defined contribution plan to be distributed to non-spouse beneficiaries by the end of the 10th year following IRA owner’s death. (There are some exceptions when it comes to minors, disabled, chronically ill or those not more than 10 years younger than the deceased IRA owner.)
- If the IRA owner’s spouse is the beneficiary, RMDs are delayed until end of the year that the deceased IRA owner would have reached age 72 (age 70½ before SECURE).
- Prohibits Credit Card Access to 401(k) Loans. The SECURE Act prohibits 401(k) loans provided through credit or debit cards, to discourage easy access to retirement funds to pay for routine purchases. (To some, this can be recorded under benefits above.)
Is the SECURE Act good for Philanthropy?
The SECURE Act reinforces Charitable IRA rules without raising the QCD to 72, so in that sense, yes. However, since people now have an additional two years to take a RMD, they may not decide to use a portion of it for charitable purposes at the ages of 70 and 71. That means philanthropic gifts that were a result of the previous requirements may drop.
How is the SECURE Act good for philanthropy?
For individuals who are philanthropically minded … remind donors that:
- Retirement plans are normally taxed at a much higher rate. So leaving less-taxed assets to heirs is much more favorable since there’s zero-tax if donated to charity.
- Heirs now have only 10 years to take Required Minimum Distributions, which means the government will get their taxes much sooner.
- Now’s a good time for a thorough tax review by an expert. In some cases, it might make sense to leave an IRA to charity and purchase life insurance for your children; or open a charitable remainder trust to maximize legacy benefits.
What Are Philanthropically Inclined
Advisors Telling Donors?
More importantly, how about advisors who are not philanthropically inclined? Learn this and more in our webinar.
What Are Your Peers Asking?
Here are several questions we’ve received by professionals in philanthropy and we’ve answered as many as we could. Not to be taken as legal advice.