The SECURE Act
On December 20th, President Trump signed into law the SECURE Act, which makes significant changes to retirement savings plans. The bill was signed into law with the intention that it would encourage individuals to save more since roughly one-third of the population does not meaningfully save for their retirement, according to Forbes.com.
The Setting Every Community Up for Retirement Enhancement Act, or SECURE Act, went into effect on January 1, 2020. The noteworthy provisions of the legislation are as follows:
- The required minimum distribution age for retirement accounts is increased to 72 (up from 70½). Individuals that reached age 70.5 before January 1, 2020 must continue to take out required minimum distributions (sorry – no break for those of you that turned 70.5 in 2019).
- Repeals the maximum age for traditional IRA contributions, which is currently 70½. As long as you have earned income, you can contribute to a traditional IRA at any age.
- In the past, beneficiaries of an inheritance that included retirement plans like 401(k)s, traditional IRAs, and Roth IRAs could spread out the required distributions over their own life expectancy. However, the new bill would require most beneficiaries to distribute the account over a 10-year period (note inherited assets prior to January 1, 2020 can continue to be withdrawn on the beneficiary’s life expectancy). Spouses, minors, relatives within 10 years of the deceased age and the disabled are exempt from the 10-year distribution stipulation.
- Parents can withdraw up to $10,000 from 529 plans penalty/tax free to repay student loans.
- Makes it easier for small businesses to band together to offer 401(k) plans. This could potentially give small businesses access to lower cost plans with better investment options and lower administrative fees. Also, a tax credit of $500 will help encourage automatic enrollment into the retirement plan to help alleviate start-up costs.
- Allows long-term part-time workers to participate in 401(k) plans. Currently, employers generally can exclude people who work less than 1,000 hours per year from its defined contribution plan. The new bill makes any employee who has worked for at least three years and at least 500 hours a year eligible to participate in the retirement plan.
- Allows more annuities to be offered in 401(k) plans. Today, many 401(k)s stay away from annuities, in part because of concerns about liability in picking an annuity provider for the plan. The new rules would essentially ease this liability concern, potentially opening up the path for more annuities to be offered inside of retirement plans.
Along with the increase in RMD age, the biggest impact of the legislation in our opinion is the provision that inherited retirement accounts must be distributed within 10 years, removing the ‘Stretch IRA’ strategy. Previously, beneficiaries could grow their wealth and avoid taxes for many years. When they do pay taxes, they can spread out the impact over many years. The SECURE Act will eliminate this stretch ability for many non-spouse person beneficiaries and will create heavier tax burdens for beneficiaries. We are happy to discuss how the SECURE Act impacts your financial plan moving forward.