The SECURE Act is the largest retirement-focused legislative reform in decades. Its provisions impact individual investors and the retirement plans they may have access to through employers. These changes were intended to improve access to and attractiveness of retirement plans to help address Americans’ growing concerns with their ability to save for their own retirement. While many provisions are small (and potentially not applicable to many), the breadth of the bill is such that that all workers, investors, and retirees will need to review their financial plan to ensure that potential opportunities are seized and landmines are averted.
Retirement Provisions Impacting Individuals
Required Minimum Distributions age changes to 72
Beginning in 2020, the SECURE Act raises the age at which retirees must start RMDs from 70 ½ to 72. Individuals who reached 70 ½ in 2019 will continue to fall under the old rules and need to continue RMDs.
"Stretch" IRA provisions replaced by 10-year-rule
When an individual inherits a Traditional IRA, they also inherit the deferred tax obligation that goes with it. Previously, beneficiaries could manage that tax liability by “stretching” distributions, and taxes owed, over their lifetime. The SECURE Act removed this option for non-spouse beneficiaries who inherit a qualified account (IRA, 401k, and yes, Roth IRAs, etc.) with the imposition of a new 10-year rule. This rule requires non-spouse beneficiaries to distribute the full amount in the account within 10 years. There is no “account minimum” exempt from this rule, however, spouses, minor children of the deceased, disabled and chronically ill individuals are exempt. This rule applies to inherited accounts where the owner died in 2020+. Individuals who inherited an account prior to 2020 do not lose the “stretch” and will remain subject to the pre-SECURE Act laws and regulations.
IRA Contribution Rules Expanded
The SECURE Act eliminates the age limit on Traditional IRA contributions which was 70.5. As long as you have earned income you can continue to make deductible or non-deductible contributions to a Traditional IRA regardless of your age.
Additional changes now provide graduate students increased opportunities for tax deferred saving. The SECURE Act now permits graduate students to count taxable stipends and non-tuition fellowship payments as earned income for the purposes of making Traditional or Roth IRA contributions.
Penalty Free Withdrawals for Birth and Adoption Expenses
Under the SECURE Act, individuals will be allowed to withdraw up to $5,000 penalty free from retirement accounts to help cover birth and adoption expenses. While penalty free, distributions will remain taxable.
Certain Laws Didn't Change
Over the last five years Congress had proposed multiple retirement bills that contained similar provisions to the SECURE Act, but many of which did not make the final bill. The following are items that were not modified by the SECURE Act and continue as they are under current law:
Qualified Charitable Distributions (QCDs): The age at which you can make qualified charitable contributions (QCDs) remains the same: 70 ½. It does not also increase to the new RMD age of 72. This lack of a law change provides individuals the opportunity to make financially smart charitable contributions before and after their RMDs begin.
Life Expectancy Tables: While the SECURE Act changed the start age for RMDs from 70.5 to 72, the life expectancy tables used to determine the amount of the RMD remains the same. That said, the IRS has separately proposed revising these tables which may impact RMDs beginning in 2021 if approved.
Non-Retirement Related Provisions
Kiddie Tax Trust Rates Replaced
The SECURE ACT repeals changes to the kiddie tax put in place by the Tax Cuts & Jobs Act of 2017, which made the investment income taxable at trust rates. Going forward, the “old” kiddie tax laws will apply, meaning that the child’s tax will be based upon the parents’ tax rates.
New 529 Plan Distribution Options: Student Loan Debt & Apprenticeship Programs
The SECURE Act now permits 529s to be used to repay student loan debt. Parents can now withdraw up to $10,000 per 529 plan beneficiary over their lifetime to repay student loans. This offers additional planning opportunities by expanding what qualifies for a tax-free distribution for 529 plans.
Another 529 plan change included in the SECURE Act allows for tax-free 529 plan distributions to pay for registered apprenticeship programs if the program is registered and certified with the Department of Labor. Eligible program expenses include fees, books, supplies, or required equipment.
Changes Impacting Retirement Plans
Tax Credit for New Retirement Plans
The SECURE Act gives employers a tax credit for startup costs related to establishing an employer plan (up to $5,000). The company would be eligible for a $250 tax credit per non-highly compensated employee (non-HCE) at the company, up to a maximum of 20. For example, an employer with at least 20 non-HCEs would qualify for the full $5,000 credit ($250 x 20). This credit can be claimed for up to 3 years.
Tax Credit for Automatic Enrollment Provisions
Under the SECURE Act, a new $500 credit is offered for the first year a small business adds an “auto-enrollment arrangement” to their plan. Additionally, Congress increased the maximum auto-enrollment contribution percentage from 10% to 15% effective in 2020. This credit can be claimed for up to 3 years.
Expanded Opportunities for Multiple Employer Plans
Multiple employer plans (MEPs) allow at least two unrelated employers to maintain a retirement savings plan while sharing the administrative costs. But, under current rules, if one plan member fails to fulfill its obligations the entire plan would be disqualified. The SECURE Act makes these plans more attractive to participating employers. Beginning in 2021, after IRS rule changes, only the disqualified member would be penalized while rest of the plan maintains its qualified status.
New Savings Opportunities for Part Time Workers
Part time workers who work more than 500 hours for three or more consecutive years will be required to be eligible to contribute to 401k employer plans. While this requires eligibility, it does not require employers to make matching contributions for this type of employee. Since this law begins in 2021 and requires 3 years of employment, part time workers won’t be eligible to contribute until 2024.
Increased Access to Annuities in Employer Retirement Plans
The SECURE Act clarifies and eases the fiduciary rules related to the liability associated with offering annuities within an employer retirement plan. Additionally, the SECURE Act creates portability for annuities purchased within a plan.
Goodbye 401k Credit Cards
Plan participants will no longer be allowed to borrow from their 401ks with credit card loans. Some plans allowed 401k loans to be offered via a credit card, however it wasn’t clear that the credit card loans had to be repaid. The SECURE Act eliminates the ability to offer 401k loans via credit card.
While many tax changes appear simple, complexity will inevitable arise when applied to specific individual situations. In the coming year, it’s important to review your situation to understand what these changes mean for you and your financial plan. Markets change, laws change, and your circumstances change. And it’s important that you continue to evaluate your plan to see if it also needs to change in order to keep you on track to meet your goals. Fortunately, you don’t have to do it alone; we’re here to help guide you through whatever changes come your way.
CFP®, CPA, Series 7 Securities Registration,1Series 66 Advisory Registration,† Insurance License Brian diligently advises clients on income, gift, trust and estate tax issues while leveraging the expertise of the Roundtable to deliver comprehensive, customized strategies. For more than 10 years he has helped numerous clients develop and implement sophisticated financial, tax and estate strategies that are in alignment with their goals and values. Brian is a...Read More