The Setting Every Community Up for Retirement Enhancement Act of 2019, or SECURE Act, was passed by the House in July 2019 and approved by the Senate on Dec. 19, 2019, as part of an end-of-year appropriations act and accompanying tax measure. It was signed into law on Dec. 20 by President Donald Trump and took effect on Jan. 1, 2020. The SECURE Act is important because it will be the first major retirement/pension change since the 2006 Pension Protection Act.
The SECURE Act has several provisions that will impact our farm clients. Below is a brief summary of the key provisions:
-- Currently, you are not allowed to contribute to an IRA once you reach 70 1/2. The SECURE Act will allow you to contribute after the age of 70 1/2.
-- Now, you must start taking required minimum distributions at the age of 70 1/2. The SECURE Act increases the age to 72.
-- Under the SECURE Act, employers are able to offer more annuity products in retirement plans. However, the SECURE Act lessens employer liability if the annuities run into trouble.
-- The SECURE Act allows for pooled retirement plan programs. That will allow small employers to come together and offer retirement plans and share the costs.
-- The SECURE Act opens up employer-offered retirement plans to part-time employees who have three consecutive years of service and at least 500 hours of service per year.
-- There are new tax credits aimed at encouraging small employers to offer retirement plans and have their employees automatically enroll.
-- If you inherit a retirement account prior to Jan. 1, 2020, you are allowed to "stretch" the distributions over your life expectancy. Under the SECURE Act, beneficiaries are required to take distributions over a 10-year period (with some exceptions).
Depending on your point of view, the SECURE Act provisions are a mix of good and bad. But, as a whole, it provides many benefits to employers and employees.
The reason I decided to write about the SECURE Act is that I've been discussing retirement plans with my clients. One of the adages lost on the farm community is to "pay yourself first." My clients are so focused on paying little to no tax, they purchase equipment or prepaids. My response is, "Why not put some money aside in a pretax retirement plan?"
Farming is a cyclical industry. When it's good, farmers plow equity back into the operation only to see it erode during bad times. And, when they want to retire, they often do not net enough money to live comfortably.
I'd urge you to stop chasing tax and put some money away for retirement. Over the course of a career, you would be surprised how much relatively small annual contributions could grow in value. And, an IRA is a great way to deal with the on-farm/off-farm heir situation. One kid gets the farm, the other gets the IRA.
Editor's Note: DTN Tax Columnist Rod Mauszycki, J.D., MBT, is a tax principal with CLA (CliftonLarsonAllen) in Minneapolis, Minnesota. Read Rod's "Ask the Taxman" column at www.about.dtnpf.com/tax. You may email Rod at firstname.lastname@example.org.
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