The SECURE Act – Impacting Retirement Planning

The SECURE (Setting Every Community Up for Retirement Enhancement) Act was signed into law by the president on December 20, 2019.  This act incorporates some of the largest changes to retirement savings since the Pension Reform Act of 2006.  The bill will be effective January 1, 2020.  The act makes sweeping changes to the Required Minimum Distributions (RMD’s), Stretch IRAs (created when an original IRA owner dies and leaves the account to non-spouse beneficiary), and Traditional IRA Contribution age.  Below is a breakdown of these changes.

Required Minimum Distribution Start Age Changed to 72

Prior to 2020, the law stated if you had assets in an IRA, you would be required to begin withdrawing a portion of those assets over your life expectancy, beginning in the year in which you turned 70.5 – sounds confusing right?   The good news is you can now defer those mandatory (and taxable ) distributions another year and a half to the year in which you turn 72.  Those who turn 70.5 in 2020 will not be required to take RMDs, but those who turned 70.5 after 7/1/2019 will be required to do so.  Effectively, the  change allows for increased planning opportunities with respect to IRA distributions and pushes back the correlating tax liability for an additional 1-2 years.

Traditional IRA Contribution Age Limit Eliminated

Prior to the new law’s passing, anyone over the age of 70.5 was prohibited from contributing to a traditional IRA, even if they had earned income.  The new law allows for anyone of any age with earned income to contribute to a traditional IRA (subject to other income restrictions same as before).  This is great news for those who are working and do not have access to an employer-sponsored retirement plan.

The Stretch IRA is Dead

The new law eliminates the ability to stretch beneficiary distributions over their life expectancy, instead forcing the inherited IRA (or ROTH IRA) to be distributed by the 10th year.  This eliminates the ability to leave your IRA or retirement accounts to younger children (or grandchildren) to allow them to withdraw the balance over their lifetimes.  In the new version of the law, the beneficiary doesn’t have to take a distribution every year, but they must distribute all assets from the account by the end of the 10th year.  There are several categories of beneficiaries not subject to the ten year rule: spouses, disabled (IRC Section 72(m)(7)) beneficiaries, those who are chronically ill (IRC Section 7702Bc(2)), individuals not more than 10 years younger than the decedent, and certain minor children (until reaching age of majority).

Other Provisions

There are a few other notable changes to the retirement plan landscape:

1. Simplified process to offer Multiple Employer Plans (MEPs) (ideal for smaller businesses to provide a 401(k) plan at a lower cost)
2. Inclusion of “lifetime income” products ( i.e. annuities) in 401(k) plans
3. Taxable non-tuition fellowship and stipend payments treated as compensation for IRA purposes (allows graduate students to make IRA contributions)
4. Changes to auto-escalation feature in 401(k)s allowing for auto-escalation up to 15% of pay (vs. 10% before change)
5. Allowing use of 529 plan funds to pay off up to $10,000 in student loan debt per beneficiary
6. Reversion of the Kiddie Tax rules to tax any income of child subject to tax at parent’s marginal rate as opposed to the trust tax rates

The information presented in this article is for educational purposes only and is not meant to provide individual advice to the reader. There is no guarantee the information provided above relates to your personal situation. All financial situations are unique and should be advised as such.

Author

Sean Guldi