The Setting Every Community Up for Retirement Enhancement Act (SECURE) is part of the government’s spending bill that includes numerous provisions intended to strengthen retirement security across the country. It is designed to open up opportunities to segments of the workforce that was previously not covered in retirement plans. In addition, the bill attempts to bring more flexibility to selecting retirement plans for small businesses in particular.
The bill is part of a larger government spending package, signed into law in December 2019. The reforms could make saving for retirement easier and more accessible to many Americans. It particularly increases access to tax advantages for young families and prevents older Americans from outliving their assets.
Longer life expectancy than previous generations and an increasing rate of inflation is in part responsible for the creation of this bill. It will allow more workers in America access to workplace retirement opportunities and benefits.
How Will the SECURE Act Affect Small Businesses?
The Bill has major changes that affect small businesses. Below are some of the changes to expect from the new SECURE Act.
RMDs Begin at 72
Through the bill, Americans can start withdrawing from their Required Minimum Distributions (RMDs) at the age of 72, up from 70 ½ years.
Make it Easy for Small Businesses to Join MEPs
SECURE allows small businesses to sponsor employee retirement by removing restrictions on Multiple Employer Plans (MEPs). In essence, allowing small businesses to enter a plan with other businesses. Under the new multiple employer plan, employers do not have to be related to one another. Thus eliminating the Internal Revenue Service’s (IRS) rule that all MEP participants face consequences if one employer falls out of compliance. Businesses considering taking advantage of the new law can now join a multiple employer plan, which will be available in 2021.
Long Term, Part-time Employees Can Join Too
Long-term., part-time employees will be able to join their company’s 401(k) plan. Previously those who worked less than 1,000 hours a year, were generally deemed ineligible to participate in their company’s 401(k) plan. With the new bill, they too can be eligible.
Businesses Can Get Tax Credit
Small business owners can receive a tax credit of up to $5,000 for starting a retirement plan. SECURE now provides a start-up retirement plan credit for smaller employers of $250 per non-highly compensated employees eligible to participate in a workplace retirement plan at work. The minimum credit is $500 while the maximum credit amount is $5,000. This credit would apply to small employers with up to 100 employees over a 3-year period beginning after December 31, 2019, and applies to Simplified Employee Pension (SEP), Savings Incentive Match Plan for Employees (SIMPLE), 401(k), and profit-sharing types of plans.
529 Funds Can Help Pay Student Debts
You can use your 529 funds to pay for student debts amounting to $10,000. Families with 529 plans who have funds left over after paying college expenses can use the money to help pay for student loans.
More Transparency on Retirement Income
The new bill will mandate lifetime income disclosure statements. This will let you know how much money you can potentially receive each month if you use your total 401 (K) balance to purchase an annuity.
Easy Transition to Another Plan
SECURE can distribute your lifetime income investment from your workplace retirement plan. Under this bill, the retirement income options would be transferable. If you leave your job, you can still roll over your lifetime income investment to another 401(k) or other plans.
More Incentives to Save
The bill encourages retirement savings by raising the cap for auto-enrollment contributions in employer-sponsored retirement plans. The cap has been raised from 10% of pay to 15%, allowing the amount withheld for your retirement savings to go up every year until you’re contributing 15% of your pay to your retirement savings plan.
Option to Make IRA Contributions Beyond 70½
Previously, you couldn’t contribute to a tax-deductible IRA after 70 ½ of age. But with the SECURE Act, you can plan on working into your 70s and still put money into a deductible IRA. Basically, this means that a couple over 70 ½ will be allowed to save to an IRA over $14,000 in 2020 if both spouses are contributing the maximum of $7,000 a year. This helps them to receive a valuable tax deduction and also save for the future.
This is good news for retirees looking for ways to go back to work. Particularly retirees looking for part-time gigs, they can see additional retirement funding coming their way.
Allows Funds for Life-Changing Instances
Under specific cases, the bill allows funds from a retirement fund to pay off certain life-altering costs. You can use it to service student debts, childbirth or adoption fees. This allows penalty-free withdrawals of up to $5,000 from retirement plans for childbirth or adoption.
More Options in Annuities
The SECURE Act also allows more employers to offer annuities as investment options within 401(k) plans. Currently, employers hold the responsibility to ensure these offerings are appropriate for employees’ portfolios. However, under the new rules, the responsibility falls on insurance companies, which sell annuities, to offer proper investment choices.
Annuities are basically insurance contracts where you pay a set amount of money and you get a larger payment or stream of income in the future. Critics warn that making the wrong choice can be detrimental to a person’s portfolio. As they could result in heftier fees and penalties if used incorrectly.
Shorter Inherited IRA Distribution
SECURE has also changed the required minimum distributions for non-spousal account inheritors. Previously, beneficiaries who did not inherit their accounts from a husband and wife are in some cases allowed to withdraw required minimum distributions for the span of their lives. These could be either a few years or a few decades. The length of reimbursement is calculated based on factors, that include life expectancy and beneficiary age. With SECURE you can claim accounts you inherit within 10 years. One caveat from this change is it might result in higher tax bills, especially if the inheritor is in his/her peak earning years.
Retirement Savings and Small Business Owners
Many small business owners don’t invest in retirement plans as they believe they are either too small or fear the costs could be high. The fact that it is far into the future and it requires long-term planning and focus play a big role. Moreover, most small businesses don’t have a full-fledged HR department that could help in navigating the intricacies related to retirement planning. This is further compounded by the fact that one has to make difficult speculations in terms of inflation, life expectancy, rate of return, and other calculations.
Granted other benefits such as life and disability insurance may be important to many employees. These benefits, however, are far less valuable when you compare it against retirement plan benefits. The challenge is people often view retirement as a far-off issue. If you have a predominately younger workforce the issue of retirement can be seen as something far in the future and intangible. Younger employees might see living for today a whole lot more fun than saving for the future. What many fail to realize is their small contributions today make for compounded interests as years go by.
Another challenge in regard to retirement plans is being unaware. Employees often don’t know what retirement benefits are worth because many companies do a poor job of educating and promoting their value.
Educating Your Workforce
As a small business owner, you have a balancing act that involves looking after your employees while not hurting your bottom line. A key motivator towards retaining your staff is to provide them with benefits that shows them they are taken care of. Among these is helping prepare your employees for a good retirement.
By having a retirement plan you help your employees have financial security during their golden years. The contributions they make through their payroll deductions are easy enough that it doesn’t make a dent on their savings. By having a retirement plan, they can see reductions in their taxable incomes.
Providing your employees with retirement options is also great for your business. Employees today would rather have more benefits than see a pay raise. A 401 (k) plan for your employees provides your business access to tax credits and other incentives. A good retirement plan helps attract and retain specialized employees- employees that your business needs. Through time the assets in your plan grow and are tax-free. As an employer, your tax-deductible contributions are also a perk. This means you will see a reduction in your taxable income, which in turn can reduce your federal income tax.
Retirement plans are a terrific way for you, as a business owner, and your employees to financially protect the future. Not only do retirement accounts shelter your investment earnings from taxation, but contributions to these accounts are also generally tax-deductible.
A key to smart investment in retirement plans requires planning. As such it is important to consult with qualified professionals to see which retirements plan suits both your business and employees. Qualified professionals can help you transform the confusing aspects into a concrete action plan. Thus, helping you get clarity about retirement issues.
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