In the waning days of 2019, the U.S. Congress passed a bipartisan spending bill that helped avoid a government shutdown, but attached to that spending bill was a piece of legislation called the Setting Every Community Up for Retirement Enhancement Act, or the SECURE Act, for short.
It originally seemed that this particular piece of legislation had been losing traction in the fall, but apparently it was actually moving forward, because it became added to law with its passage in the last few weeks of the year.
The SECURE Act is the first major piece of retirement legislation to come along since 2006’s Pension Protection Act, and the SECURE Act is making some significant changes that will have serious ramifications for the average American’s retirement planning, both positive and negative.
This piece of legislation has 29 separate provisions, including age limit changes for IRA contributions and elements related to helping small employers establish retirement plans, to name a few. We’ll try to focus on the different sections in future blogs, but today, we wanted to dial in on one of the more time-sensitive changes that can possibly enhance your planning for the future.
One of the many components of this act (which you can read here for yourself) is a particular section that expands the window for the treatment of a stock bonus, pension, profit-sharing, or annuity plan on your taxes.
To make it a bit easier to understand, let’s say that in January of 2021, you decided that it’s a good time to establish a 401K for your Schedule C business. You sat down with your accountant, tallied up your financials, you know what your year-end numbers look like, and you’ve got some extra cash that you’d like to sock away for the future. Under the previous law, if you did that today, it would have to be included on your 2021 taxes, meaning that you wouldn’t get to enjoy the tax benefits of this move for over 11 months.
These new changes give you a bit more flexibility about how you treat that 401K when it comes to your taxes, but they don't kick in until this year. Let’s go back to that 401K that we were thinking about in that previous example. Under the SECURE Act, if you’re thinking about that 401K for your business, any money you put toward it before you file your 2020 taxes can actually be treated as if you made that move on December 31st, 2020. (And this goes for every year going forward, not just the 2020 example we just mentioned) So if you decide to contribute to your 401K in, let’s say, February of 2021, as long as you haven’t filed your 2020 taxes, you can include that contribution in your 2020 figures.
This is a great boon, especially for people or organizations that are waiting to see how their previous financial year shakes out before they know what they have for available cash that’s suitable for retirement investing. For a lot of us, those year-end taxes are the chance to really find out how we fared in the previous twelve months.
Sounds pretty good, right? You get to save a bit more for the somewhat distant future of retirement, but you also get to enjoy the tax benefits of this contribution in the very near future. The SECURE Act is full of little provisions like these that help make it easier to plan for retirement, both for yourself and for your organization. As the weeks go on, we’ll show you a few more of these provisions that we think you should make yourself aware of for this next fiscal year.
The SECURE Act is definitely a big deal as far as financial legislation goes, but it’s not the first time that the landscape has shifted, and it definitely won’t be the last. If you don’t have a full grasp of the changes, no matter how minor they may seem, your organization could be missing out on valuable resources that could mean the difference between success and just squeaking by at the end of the month, quarter, or year.
Core Group is ready to put a high level of expertise on your team to make sure that your accounting, payroll, and cash management processes are humming along smoothly and effectively. We’ve got experience in your industry, and our team is ready to be part of yours.