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Retirement Perspectives

Here’s a glimpse of how the new law aims to give investors more incentive to boost retirement savings.

After months of uncertainty, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, clearing the way for one of the most significant pieces of retirement plan and education account legislation in more than a decade. On December 20, President Trump signed the SECURE Act into law.

 

Advisors, investors, retirees, and tax professionals should pay close attention to the effective dates. Several provisions became effective on the date of enactment, while others become effective on Jan. 1, 2020. This means that effective dates vary by provision.

 

The SECURE Act makes numerous changes to both Internal Revenue Code (IRC) and Employee Retirement Income Security Act (ERISA) that will expand retirement plan coverage for workers and increase savings opportunities.

Here are the key provisions affecting employer retirement plans, individual retirement accounts (IRAs), and Section 529 Plans included in the SECURE Act

Traditional IRA contribution allowable at any age – Beginning in 2020,  eligible taxpayers can make traditional IRA contributions at any age (age limit was 70½).  In other words, the act eliminates the current age 70½ limit for contributing to a traditional IRA. Individuals 70½ and older will now be eligible for the back-door Roth!

Tip: Roth IRA does not impose an age cap. Therefore, anyone that satisfies the income threshold and has compensation can fund a Roth IRA.

IRA contributions (Fellowship and Stipends) – Permits graduate students to count taxable stipends and non-tuition fellowship payments as compensation (earned income) for the purposes of making (traditional or Roth) IRA contributions.

Treat Payments to Home Healthcare Workers as Compensation - The act permits home healthcare workers to contribute to a retirement plan or IRA based on compensation (so-called “difficulty of care” payments) that is tax-exempt.

Delay required minimum distributions (RMDs) – Increases the age when RMDs must begin from age 70½ to 72. This provision would apply to IRAs, 401(k), 403(b), and governmental 457(b) plans. This change applies only to those individuals who turn 70½ in 2020 or later. For example, an individual turning 70½ on December 23, 2019 will not yet be 72 in 2020; therefore, they will still be required to take RMDs under the existing rules. Click here to get more information about changes in RMD rules

New exception to 10% early distribution penalty – Exception would allow a penalty free distribution up to $5,000 from an IRA or employer plan referred to as “Qualified Birth or Adoption Distribution.” To qualify, the account owner must take a distribution during the one-year period beginning on either (1) date of birth or (2) date on which the adoption (individual must be under age 18) is finalized. The provision allows the individual that took the distribution to repay the distribution back to the plan or IRA at a later date.

Expand eligible expense categories for Section 529 Plans – Tax-free 529 plan distributions can be used to pay for registered apprenticeship programs if the program is registered and certified with the Department of Labor. Eligible program expenses include fees, books, supplies, or required equipment.

Student loan repayment using savings in 529 Plans – Tax-free distributions from 529 Plans for qualified student loan payments referred to as “Qualified Education Loan Repayments” can be used to pay down (principal and/or interest) a qualified education loan – limited to a lifetime amount of $10,000. This provision is effective at the beginning of 2019.

Delayed Adoption of a Qualified Retirement Plan Beginning in 2020, a new plan would be treated as effective for the prior tax year if it is established later than the due date of the prior year’s tax return. Notably, this provision would only apply to plans that are entirely employer funded (i.e. profit sharing, pension, and stock bonus plans).

Eliminate plan loans using credit cards – Effective immediately (upon enactment), 401(k) plan loans can no longer be made via credit card.

Allow 403(b) Custodial Accounts under Terminated Plans to be Distributed in Kind – Treasury must issue guidance that an individual 403(b) custodial account can be distributed “in kind” to the participant in a terminating plan and that the “distributed” account would retain its 403(b) tax-deferred status.

Curtail “stretch” payout to certain beneficiaries – Eliminates the ability to “stretch” post death payments based on the life expectancy of the beneficiary. Instead, certain beneficiaries that inherit a retirement account will be required to take post-death distributions at a more rapid payout – no more than 10 years.

Beginning for deaths after December 31, 2019, the “stretch” will be replaced by a 10-year payout period for most beneficiaries. The new accelerated payout applies to all beneficiaries except: surviving spouse, minors, those beneficiaries that are disabled or chronically ill, and beneficiaries that are not more than 10 years younger than the account owner. These beneficiaries are exempt from the 10-year payout and instead can continue to “stretch” based on their life expectancy.

Notably, there would be no annual RMDs; however, the entire account needs to be distributed by the end of the 10th year following death of the account owner. This provision applies to beneficiaries of IRAs, qualified defined contribution plans, 403(b), and 457 plans as well. Notably, for deaths taking place in 2019 or earlier, the “old” payout rules apply.

Establish Open Multiple Employer Plans (MEPs) – Employers of all sizes can band together to create an “open” MEPs, referred to as “Pooled Plans.”

Part-Time Employee Eligibility for 401(k) Plans - Allows for long-time part-time workers to become eligible to participate in 401(k) plans. Sponsors of 401(k) plans will be required to allow employees who work at least 500 hours during each of three consecutive 12-month periods to make deferral contributions. Notably, long-term part-time employees eligible under this provision may be excluded from eligibility for employer contributions.

Increased Tax Credits – Small employers who start a new retirement plan will increase to $5,000 from $500. Furthermore, small employers who add automatic enrollment to their plans also may be eligible for an additional $500 tax credit per year for up to three years.

Lifetime Income Disclosure - Defined contribution plans (e.g., 401(k)) will be required to provide a disclosure to plan participants illustrating the amount of lifetime income that could be provided if the entire account balance is used to purchase a single lifetime annuity or a qualified joint and survivor annuity for the employee and the employee’s surviving spouse.

The SECURE Act also contains provisions that:

  • Simplify the Safe Harbor 401(k) rules
  • Expand portability of lifetime income options
  • Provide a fiduciary safe harbor for selection of a lifetime income provider
  • Modify the nondiscrimination rules to protect longer-service participants.
  • Increase the cap on auto-escalation for certain safe harbor 401(k) plans from 10% to 15% after the first year

We’ll have more to say about the SECURE Act in the weeks to come, including an explanation of  what some of its key provisions mean for retirement investors. Click here for information about changes in RMD rules. Stay tuned.

Advisors, if you have additional questions, please contact your Lord Abbett representative at 888-522-2388.

 

To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter.

The information is being provided for general educational purposes only and is not intended to provide legal or tax advice. You should consult your own legal or tax advisor for guidance on regulatory compliance matters. Any examples provided are for informational purposes only and are not intended to be reflective of actual results and are not indicative of any particular client situation.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett's products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

GLOSSARY

Traditional IRA contributions plus earnings, interest, dividends, and capital gains may compound tax-deferred until you withdraw them as retirement income. Amounts withdrawn from traditional IRA plans are generally included as taxable income in the year received and may be subject to 10% federal tax penalties if withdrawn prior to age 59½, unless an exception applies.

A Roth IRA is a tax-deferred and potentially tax-free savings plan available to all working individuals and their spouses who meet the IRS income requirements. Distributions, including accumulated earnings, may be made tax-free if the account has been held at least five years and the individual is at least 59½, or if any of the IRS exceptions apply. Contributions to a Roth IRA are not tax deductible, but withdrawals during retirement are generally tax-free.

401(k) is a qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on an aftertax and/or pretax basis. Employers offering a 401(k) plan may make matching or nonelective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis.

A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.

A 403(b) plan (also called a tax-sheltered annuity or TSA plan) is a retirement plan offered by public schools and certain 501(c)(3) tax-exempt organizations. Employees save for retirement by contributing to individual accounts. Employers can also contribute to employees' accounts.

A 457 plan is available for certain state and local governments and non-governmental entities tax exempt under IRC Section 501. They can be either eligible plans under IRC 457(b) or ineligible plans under IRC 457(f). Plans eligible under 457(b) allow employees of sponsoring organizations to defer income taxation on retirement savings into future years. Ineligible plans may trigger different tax treatment under IRC 457(f).

A defined contribution plan is a retirement plan that's typically tax-deferred, e.g. a 401(k), at employers. An employee contributes a percentage of his/her paycheck in an account to fund retirement. The sponsor company will generally match a portion of employee contributions.

A required minimum distribution (RMD) is the minimum amount an account owner must withdraw from a retirement account each year. An owner generally has to start taking withdrawals from a retirement plan account at age 70½. Roth IRAs do not require withdrawals until after the death of the owner.

WEBINAR

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Have questions about the SECURE Act? Register for our webinar with Brian Dobbis and Steve Dopp on Tuesday, Feb. 18 at 1 pm ET. Advisors attending the live session can earn 1 CFP and/or IMCA CE credit.

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