On December 20th, 2019 the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law. Most of these new laws took place January 1st, 2020 and a couple retroactively will be applied for years going back to 2017. This is the first major piece of legislation affecting retirement plans since 2006. Some of the details still need to be worked out in various government agencies but the law makes significant and important changes to retirement and tax planning.
I want to provide a summary on some of the 29 provisions put in place that I feel will impact my clients and perhaps you when they go into effect.
Increase RMD age
Under the old rules, individuals were required to start taking their RMD distributions from qualified retirement accounts at the age of 70 ½. The SECURE Act increases the retirement age to 72. The change will apply to anyone turning 70 ½ after December 31st, 2019. If you turned 70 ½ before then you are still mandated to continue your distributions.
Removal of Age Limits for Traditional IRAs
Under the old law, when a person turned 70 ½ (and thereafter) they were no longer eligible to contribute to traditional IRAs. The SECURE Act removes this age restriction as more and more people are working into their 70s and allows individuals to continue making contributions to traditional IRA accounts as long as they have earned income.
Elimination of the qualified stretch
Under the old rules a designated beneficiary (someone living) of an inherited qualified retirement account, such as a 401(k), 403(b), or IRA, had the ability to “stretch” the distributions of said account over their life expectancy, determined by IRS Table 1. The new law changes the maximum distribution period of these accounts to 10 years. This means that the entire account balance must be gone within the 10th year of the passing of the original account owner.
There are exceptions to the 10-year rule for eligible beneficiaries. Eligible beneficiaries include the surviving spouse, individuals with disabilities, beneficiaries who are less than 10 years younger than the original owner, and minor children of the account owner. These individuals can still take distributions under the old rules before the new law was enacted.
If you have named a charity or a trust as a beneficiary, they will be forced to liquidate over a 5 year period.
Beneficiaries that are currently receiving payments based on their life expectancy can continue to do so and will not be affected by the new rules.
Annuities in Employer-Sponsored Plans
Very few plans offered annuities products with lifetime income in their retirement plan because of the liability associated with the possibility of the insurance company becoming insolvent. The SECURE Act updated the safe harbor rules to alleviate this burden.
The SECURE Act implements a new requirement on defined contribution plans (401k, 403b, profit sharing) that states that a participant statement must include the lifetime income that could be derived from the value by purchasing a lifetime annuity.
In my opinion, these types of investment options will probably result in higher internal costs to the participants. A person may find themselves in unnecessary higher cost products that could drag the performance of the underlying assets, resulting in lower wealth accumulation.
Increased Tax Credits for Employer-Sponsored Plan Adoption
Before the new law, if an employer with less than 100 employees adopted an employer-sponsored retirement plan, they were eligible for a $500 tax credit in the year of adoption and the following two years. The SECURE Act increases the tax credit to the lesser of $250 per non-highly compensated eligible to participate in the plan; or $5,000. The increased credit is intended to help offset the establishment of the costs associated with establishing a retirement plan.
Early Withdrawal Exception Change for Birth or Adoption of a Child
The SECURE Act added an early withdrawal exception to the list of penalty free withdrawals from certain retirement accounts. Individuals will be able to withdraw up to $5,000 from retirement accounts in the event of the birth or adoption of a child without paying the IRS penalty. Depending on the type of account, income taxes may still need to be paid. The withdrawal must occur within 12 months of birth or the adoption being final.
The SECURE Act changes the list of qualified expenses from a 529 plan to include payments made for student loans of the beneficiary or a sibling of the beneficiary. The amount is subject to a lifetime income limit of $10,000 per beneficiary. This change applies retroactively to all distributions made after December 31, 2018.
Just like all changes in the law, it is extremely important to consult your tax and financial advisers to see how these changes impact you. Each time new laws are enacted and imposed the need for competent and proficient advice becomes glaringly obvious. Going through this journey alone is a treacherous venture.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Michael Anicito, CFP®, AIF®
Inspire Investment Solutions, LLC - President
Michael is an independent CERTIFIED FINANCIAL PLANNER™ and Accredited Investment Fiduciary who practices in New York and New Jersey. He works with individuals and business owners alike to help save for retirement and manage their assets. He is currently the President of Inspire Investment Solutions, LLC (www.inspireis.com). For more information or a complimentary consultation, you can reach him at 646.606.2111 or at email@example.com.