What You Need to Know About the SECURE Act

By: Franco DiLiberto

The SECURE Act

On December 20, 2019, the Setting Every Community Up for Retirement Enhancement Act of 2019, better known as the SECURE Act was signed into law.   This law affects most retirement savers, as well as employers who offer retirement plans to their employees.  The law’s provisions are designed to promote a more secure retirement for individuals, primarily by allowing more flexibility and accessibility relating to retirement accounts.  How does this law affect you?  Below are some of the key highlights and other provisions:

Key Highlights

  • To provide a little additional time for retirees to grow their retirement accounts, the required minimum distribution starting age has been increased from age 70½ to age 72 for individuals who were born on or after July 1, 1949. Under the old law, the first RMD was due on April 1 of the year after the individual turned 70½.  Under the new law, the first RMD is due on April 1 of the year after the individual turns 72.   Subsequent RMDs remain due by December 31st.

Age of IRA Holder:                                          First RMD Due Date:

Turn 70 in 2019 before July 1                           April 1, 2020

Turn 70 in 2019 on or after July 1                     April 1, 2022

Turn 70 in 2020                                                 April 1, 2023

  • Where previously traditional IRA contributions could only be made up to age 70½, the new law eliminates this age cap and allows for continued contributions up to any age, as long as the contributor continues to have earned income.
  • The “Stretch IRA” is eliminated for most beneficiaries of individual retirement accounts whose owners pass away in 2020 or later. The stretch IRA previously allowed younger, non-spouse beneficiaries to take minimal annual distributions from inherited IRAs over their life expectancies.  This strategy was used to maximize the tax-deferred growth of the account over a longer time period.  Under the new law, the entire balance of the inherited IRA must be withdrawn within 10 years.  There are no required minimum distributions each year under the new law, but the entire balance must be distributed by the end of the 10th  Beneficiaries who are exceptions to this new 10-year rule include spouses, those disabled and chronically ill, those who are not more than 10 years younger than the deceased IRA owner, and minor children until they reach the age of majority.
  • Multi-year tax planning will become increasingly important when assessing the amount and timing of inherited IRA distributions during this 10-year payout period.  Also, current beneficiary designations should be reviewed to determine whether they are still optimal under the new law.  Notably, Trusts when drafted properly were often named as beneficiaries, to both protect the assets and allow for minimum distributions over an extended lifetime, for example for grandchildren.  The 10-year payout requirement will potentially result in negative income tax consequences and additional complication for Trusts that inherit traditional retirement accounts.
  • To provide some relief for individuals burdened with student loan debt, 529 Education Plan eligible expenses now include a lifetime limit amount of $10,000 that can be used to pay off the student loans of the beneficiary, along with an additional $10,000 for each sibling of the beneficiary. Eligible expenses have been also been expanded to include the educational costs of trade schools and apprenticeships of the beneficiary.

Other Provisions

  • To increase retirement plan participation among part-time employees, employers are now required to include part-time workers in 401(k) plans if the part-time employees have completed at least 500 hours of service each year for three consecutive years and are at least age 21.
  • Retirement plans will have expanded access to annuities as an investment option. The new law reduces the liability for employers if the annuity provider cannot meet its financial obligations.
  • There are several small-business incentives to encourage employers to set up employer-sponsored retirement plans. These include additional tax credits, simplified safe harbor plan regulations, and extended deadlines to adopt qualified plans.
  • The Act reduces certain regulations on multiple employer plans, making it easier for unrelated small employers to combine their plans in order reduce administration costs.
  • To alleviate the cost of having or adopting a child, each 401(k) or IRA owner can withdraw up to $5,000 ($10,000 per couple) penalty-free within one year after adopting or giving birth to a child.

To reiterate, the new RMD starting age of 72 only pertains to individuals who were born on or after July 1, 1949.  Or said a different way, it only affects those individuals who did not turn age 70½ in 2019.  Also, the new stretch IRA provisions only affects beneficiaries whose owner dies in 2020 or later.  Existing inherited IRAs before 2020 are not affected.  For those wondering about Qualified Charitable Distributions (QCDs), those are still allowed beginning at age 70½ and they remain capped at $100,000 per person, per year.

As always, we will continue to assess the impact of the SECURE Act as more details become clear.  If you have any questions, we are here to help!