Experts: SECURE Act limits stretch retirement funds

Kathleen Stewart, senior director at BNY Mellon Wealth Management, talks with attendees of a Small Business Development Center event about the SECURE Act. | DBT PHOTO BY JACOB OWENS

CHRISTIANA – A panel of financial experts hosted by the Delaware Small Business Development Center advised investors Tuesday to double-check their retirement accounts due to changing federal regulations on beneficiaries.

While the Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed by Congress on Dec. 20, 2019, expands retirement investing opportunities and pushes back the required minimum distribution age, it also places new deadlines on beneficiaries.

Speaking at the SBDC event sponsored by Delaware Business Times at the Christiana Hilton on March 3 were Kathleen Stewart, family wealth strategist and senior director at BNY Mellon Wealth Management; James Selsor Jr., partner at Gunnip & Co. accounting firm; and Matthew D’Emelio, partner at McCollon, D’Emelio, Smith, Uebler LLC law firm.

“This [law] has kind of turned planning upside down,” Stewart told attendees.

The SECURE Act was written by Congress to limit wealthy investors ability to treat retirement plans like lifelong investment accounts for next generations, while also try to convince employers and employees to invest more into their own retirements – especially as federal deficit spending risks the nation’s Social Security Trust Fund for future generations.

Among the most discussed parts of the law for financial planners is the new limits on beneficiaries for retirement accounts beginning in 2020. While spouses, minor children, the disabled and the chronically ill are not affected, all other beneficiaries — namely adult children and grandchildren — will now have to draw down the entire retirement account within 10 years. Failure to distribute all assets from an account would result in a 50% penalty. Non-human beneficiaries, such as charities, still operate under a five-year window.

 Stewart and Selsor noted that Roth Individual Retirement Account (IRA) conversions may increase in reaction to the law, as beneficiaries under a 10-year window seek to convert funds to the tax-free investment tool before tax rates potentially rise with looming financial and political challenges.

While investors should be careful about some of the new regulations put into place, Stewart explained that the SECURE Act does offer several advantages to employees and employers alike.

It increases investment opportunity by allowing multiple employer retirement plans to be created between employers that don’t share a common industry, essentially allowing for the coalescing of more small businesses to plans to share administrative cost. That provision begins in 2021.

The law also allows part-time employees who work at least 500 hours per year for a minimum of three consecutive years to participate in employer plans starting in 2024. In addition, Stewart noted that the plan increases the age at which required minimum distributions of retirement accounts occur from 70½ to 72, allowing for longer pre-tax investment.

The federal law also added new provisions allowing for a maximum $5,000, penalty-free distribution from a retirement account following the birth of a child or an adoption and expanded tax-free education expenses to apprenticeship programs for 529 savings accounts.

For employers, the SECURE Act established a higher tax credit of $250 per non-highly compensated employee for employers that establish a new retirement plan. That credit has a $5,000 maximum but is good for three years after establishing the plan. Similarly, small employers that add an automatic contribution mechanism to their plan can claim a $500 annual tax credit for three years.

By Jacob Owens

jowens@delawarebusinesstimes.com