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Big changes came to small business owners, student-loan re-payers, retirement plan beneficiaries and part-time employees on December 20th, 2019 when The SECURE Act was signed into being. Depending on which side of the coin you are, it could either help or hinder your financial growth.
Changes to the Required Minimum Distribution (RMD) Timeline
If you are going to be the beneficiary of a retirement plan, this one could be a potential "ouch" for you.
The biggest (read: one of the most talked about) parts of the act is the removal of the "stretch" provisions for inherited retirement accounts like 401(k)s and IRA's for non-spouse beneficiaries. Under the SECURE Act, beneficiaries of retirement accounts will now be required to distribute the entire RMD amount (required minimum distribution) over a 10*-year period following the death of the plan owner. Before the change, the beneficiary to the account could have stretched the distribution over their own life time. That's a huge difference with potentially significant ramifications.
Why does this matter? First point - taxes. Because that money is now going to be distributed faster (within that **10 year period vs potentially 25+ years or more), it increases the beneficiary's taxable income, which inherently will increase their marginal federal tax rate.
But, that's not all, folks. Now, because the distributions are done over 10 years, the money will have less tax-deferred opportunities for the beneficiary.
And, to add insult to injury, now that the beneficiary will have higher taxable income, it could also result in the loss of other important deductions they were previously eligible for.
That said, if the retirement account holder passed away before January 1, 2020, the beneficiary can still take the old rule distributions.
Longer IRA growth time for your own account
All of these potential negatives aside, the Act removes the age cap for your own IRA contributions. Prior rules stopped you from being able to contribute to your IRA after turning 70.5. Now, if you're earning income past 70.5, you can contribute to that IRA indefinitely. Considering the fact that more Americans are living and working longer, having more time to contribute to your own retirement is a positive change.
The good news is that there are ways to manage these changes without it significantly affecting your finances negatively. However, these plans are extremely complex and require expertise to navigate properly.
In addition to the changes in required minimum distributions, the SECURE Act had additional elements worthy of note. It will allow small business owners by incentivizing them to offer 401(k) retirement plans to part time employees with significant tax credits.
Attract better talent with retirement incentives
If you aren't currently offering 401(k) plans but want to, then there's good news on this front! According to a recent survey, 80% of small business owners believe that the SECURE Act will help them offer 401(k) plans that compete with huge corporations. Additionally, 9/10 respondents agreed that the bill gives both their business and their employees important tax advantages and help improve employee retention.
Why? The act will increase the tax credit amount available for you to utilize towards starting up new retirement plans for your employees from $500 (old amount) up to $5,000 per year for 3 years!
Still not sure you could manage with those changes? Well, more good news. You could get huge benefits from opening Multiple Employer Plans (MEPs) so you can pool your resources with other small business owners. This way, you can offer retirement plans that are much easier to manage & administer and obviously, much more cost-effective!
Do you have lingering student loans?
The SECURE Act now allows you to withdraw up to $10,000 of penalty-free money from 529 plans to use as student loan payments.
How we can help
If you're concerned about how these rule changes will affect your small business, give us a call today. We'll help develop an advanced planning strategy to handle it.
*Note: The 10 year payout rule does not apply to beneficiaries if they are under the age of majority. Once they turn that age, they will then have 10 years to empty the retirement account they inherited.
**Note: The 10 year payout rule does also not apply to beneficiaries who are not more than 10 years younger than the retirement account holder at the time of their death. They're allowed to take distributions under the older rules.