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Published on: 12/26/2019 • 7 min read

Secure Act of 2019

March 2022 Update:

After the passage of the SECURE Act in 2019, I wrote the article below.  This year on February 23, 2022, the RIS Released long-awaited regulations for comment (these are currently only proposed regulations).  These proposals offer guidance on many parts of the SECURE Act and include a few surprises that upon passage may change some of the discussion points below.  To aid in your review of these proposed IRS Changes, I am attaching (via this link) a great summary from Ed Slott on these Potential Updates.

Setting Every Community Up for Retirement Enhancement

The $1.4 trillion spending package enacted on December 20, 2019, included the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which had overwhelmingly passed the House of Representatives in the spring of 2019, but then subsequently stalled in the Senate. The SECURE Act represents the most sweeping set of changes to retirement legislation in more than a decade.

While many of the provisions offer enhanced opportunities for individuals and small business owners, there is one notable drawback for investors with significant assets in traditional IRAs and retirement plans. These individuals will likely want to revisit their estate-planning strategies to prevent their heirs from potentially facing unexpected high tax bills.

I have summarized many of the provisions below, but the largest impact to most of my clients will be the Elimination of the Lifetime “Stretch IRA”. I focused this on a recent webinar (follow the link for access) on the SECURE Act – End of the Lifetime Stretch. In the webinar, I go through several slides discussing the SECURE Act and the impact on your retirement and estate plans as well as possible planning ideas to offset the impact of this change.

All provisions take effect on or after January 1, 2020, unless otherwise noted.

Elimination of the Lifetime “Stretch IRA”

Perhaps the change requiring the most urgent attention is the elimination of longstanding provisions allowing non-spouse beneficiaries who inherit traditional IRA and retirement plan assets to spread distributions — and therefore the tax obligations associated with them — over their lifetimes. This ability to spread out taxable distributions after the death of an IRA owner or retirement plan participant, over what was potentially such a long period of time, was often referred to as the “stretch IRA” rule.

The new law, however, generally requires any beneficiary who is more than 10 years younger than the account owner to liquidate the account within 10 years of the account owner’s death unless the beneficiary is a spouse, a disabled or chronically ill individual, or a minor child. This shorter maximum distribution period could result in unanticipated tax bills for beneficiaries who stand to inherit high-value traditional IRAs. This is also true for IRA trust beneficiaries, which may affect estate plans that intended to use trusts to manage inherited IRA assets.

With this end of the lifetime stretch IRA, traditional IRA owners may want to revisit how IRA dollars best fit into their overall estate planning strategy. Here are some example ideas:

  1. Roth IRA Conversions: It may make sense to consider the possible implications of converting traditional IRA funds to Roth IRAs, which can be inherited income tax-free. Although Roth IRA conversions are taxable events, investors who spread out a series of conversions over the next several years, using annual smart year-end tax planning, may benefit from the lower income tax rates from the Tax Cuts and Jobs Act that are set to expire in 2026.
  2. Reviewing your IRA Beneficiaries: Since your spouse would still have the ability to stretch the IRA over their lifetimes, they become much better options as primary beneficiaries in many cases. Now is a good time to consider that. In addition, charities now become even better beneficiaries of your IRAs and 401k plans. Trusts also become much worse beneficiaries for IRAs (I talk about this in more detail during the above-mentioned webinar).
  3. Charitable Planning: If you are charitably inclined, considering more advanced charitable planning (such as using charitable trusts) as your beneficiary designations. In addition, you may want to consider larger annual charitable donations during your lifetime(after age 70 ½) for Qualified Charitable Distributions (or QCDs) to blunt the growth of your IRA tax bill as well as being even more tax-savvy with your annual giving.
  4. Life Insurance: As IRAs have become less tax-efficient and as life insurance is still 100% tax-free income, strategic life insurance planning as part of your overall Estate Plan has become even more important.

As the SECURE Act is 124 pages long (you can find it here if you like), I wanted to break down and summarize the primary changes as it will impact both individuals and businesses.

Benefits to Individuals

Although the end of the lifetime stretch IRA is the big “pay for” to help offset the cost of the SECURE Act, on the plus side, the SECURE Act includes several provisions designed to benefit American workers and retirees.

  • RMDs Now Begin at age 72: Retirees will no longer have to take required minimum distributions (RMDs) from traditional IRAs and retirement plans by April 1 following the year in which they turn 70½. The new law generally requires RMDs to begin by April 1 following the year in which they turn age 72. Note that this does not impact the beginning age of Qualified Charitable Distributions (QCDs). QCDs are still allowed starting at age 70 ½ and they will still satisfy RMDs and are still capped at $100,000 annually.
  • No Age Limit for IRA Contributions: People who choose to work beyond traditional retirement age will be able to contribute to traditional IRAs beyond age 70½ as long as you continue to have earned income. Previous laws prevented such contributions.
  • More Access to Employer Plans by Part-Time Workers: Part-time workers age 21 and older who log at least 500 hours in three consecutive years generally must be allowed to participate in company retirement plans offering qualified cash or deferred arrangement. The previous requirement was 1,000 hours and one year of service. (The new rule applies to plan years beginning on or after January 1, 2021.)
  • More Retirement Transparency: Workers will begin to receive annual statements from their employers estimating how much their retirement plan assets are worth, expressed as monthly income received over a lifetime. This should help workers better gauge progress toward meeting their retirement income goals.
  • Lifetime Income Options Available: New laws make it easier for employers to offer lifetime income annuities within retirement plans. Such products can help workers plan for a predictable stream of income in retirement. In addition, lifetime income investments or annuities held within a plan that discontinues such investments can be directly transferred to another retirement plan, avoiding potential surrender charges and fees that may otherwise apply.
  • Penalty-Free Access to IRAs for Birth or Adoption: Individuals can now take penalty-free early withdrawals of up to $5,000 from their qualified plans and IRAs due to the birth or adoption of a child. (Regular income taxes will still apply, so new parents may want to proceed with caution.) This benefit is only for IRAs and not 401k plans.
  • Penalty-Free Access for Medical Bills: Taxpayers with high medical bills may be able to deduct unreimbursed expenses that exceed 7.5% of their adjusted gross income (in 2019 and 2020). In addition, individuals may withdraw money from their qualified retirement plans and IRAs penalty-free to cover expenses that exceed this threshold (although regular income taxes will apply). The threshold returns to 10% in 2021.
  • 529 Plan Updates: 529 account assets can now be used to pay for student loan repayments ($ 10,000-lifetime maximum) and costs associated with registered apprenticeships.

Benefits to Employers and Small Business Owners

The SECURE Act also provides assistance to employers striving to provide quality retirement savings opportunities to their workers. Among the changes are the following:

  • Current Tax Credits Increased: The tax credit that small businesses can take for starting a new retirement plan has increased. The new rule allows employers to take a credit equal to the greater of (1) $500 or (2) the lesser of (a) $250 times the number of non-highly compensated eligible employees or (b) $5,000. The credit applies for up to three years. The previous maximum credit amount allowed was 50% of startup costs to a maximum of $1,000 (i.e., a maximum credit of $500).
  • New Tax Credit: A new tax credit of up to $500 is available for employers that launch a SIMPLE IRA or 401k plan with automatic enrollment. The credit applies for three years.
  • Changes in Discrimination Testing: With regards to the new mandate to permit certain part-timers to participate in retirement plans, employers may exclude such employees for nondiscrimination testing purposes.
  • Access to Multiple Employer Plans (MEPs): Employers now have easier access to join MEPs regardless of industry, geographic location, or affiliation. “Open MEPs,” as they have become known, offer economies of scale, allowing small employers access to the types of pricing models and other benefits typically reserved for large organizations. (Previously, groups of small businesses had to be affiliated somehow in order to join a MEP.) The legislation also provides that the failure of one employer in an MEP to meet plan requirements will not cause others to fail, and that plan assets in the failed plan will be transferred to another. (This rule is effective for plan years beginning on or after January 1, 2021.)
  • Changes in Auto-Enrollment Contributions: Auto-enrollment safe harbor plans may automatically increase participant contributions until they reach 15% of the salary. The previous ceiling was 10%.

Please read important disclosures here

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