The SECURE Act of 2019
In May of 2019 the House of Representatives passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The bill then lost traction in the Senate going nowhere for months. However in late December it reappeared and was unexpectedly included in an appropriations bill passed by the Senate on December 19, 2019. Considered to be the first significant retirement legislation since the Pension Protection Act of 2006, the SECURE Act, which went into effect January 1, 2020, addresses provisions to reform workplace retirement plans and expand retirement savings. We would like to highlight some of the more notable changes contained in the Act and how they may impact you and your financial planning.
- Required Minimum Distribution (RMD) age raised from 70 ½ to age 72. For individuals turning 70 ½ in 2020, their beginning date for RMDs is now pushed back to the year they turn age 72. Individuals under age 72 who have already begun RMDs must continue taking distributions under the old rules. Qualified Charitable Distributions (QCDs) will still be permitted in the year one attains age 70 ½.
- Contributions to Traditional IRAs have been extended beyond 70 ½ as long as the taxpayer is working and has earned income. Previously, individuals were no longer able to contribute to a Traditional IRA once they attained age 70 1/2. Contributions may also be made to spousal IRA’s.
- Changes in ‘Stretch’ IRA distributions. Previously, non-spouse beneficiaries were allowed to withdraw RMDs based on their life expectancy, potentially deferring taxation on assets for decades. Under the SECURE Act, non-spouse beneficiaries must withdraw all assets on an ‘inherited’ account within 10 years. There are no minimum annual distribution requirements, but the entire balance must be distributed after the 10th year. There are a few exceptions if the non-spouse beneficiary is a minor, disabled, chronically ill or not more than 10 years younger than the deceased IRA owner. Existing beneficiaries of Inherited IRAs, including an Inherited IRA established in 2020 for a named beneficiary as a result of an IRA owner’s death in 2019, will continue to be able to ‘stretch’ their distributions over their life expectancies.
- Penalty-free withdrawals. The SECURE Act will now permit penalty-free withdrawals, up to $5,000 per spouse, from a 401K, IRA or other retirement account prior to age 59 ½ and within one year of child birth or adoption for related expenses.
- Changes to 401K plans. The SECURE Act will make it easier for employers to offer annuities as investment options in 401K plans by providing safe harbor for plan sponsors.
Further, plan providers will be required to provide “lifetime income disclosure statements” annually to plan participants.
- Employer Sponsored Retirement plans. The SECURE Act expands the rules governing Multiple Employer Plans (MEPs) which are meant to reduce the administrative costs associated with providing employees with a 401K retirement savings option. The SECURE Act also allows more part-time workers to participate in plans by lowering eligibility thresholds.
- 529 Plans. The SECURE Act allows for up to $10,000 per beneficiary to be withdrawn as a qualified expense to pay student loans and costs of apprenticeship programs.
The provision likely to have the most impact–and require thoughtful tax and estate planning consideration–is the elimination of the ability to ‘stretch’ retirement account distributions over the life expectancy of non-spouse beneficiaries. This popular tax and estate planning strategy had the potential to allow for continued tax-deferred growth of retirement assets over several generations in a very tax efficient manner. With the passage of the SECURE Act, this planning opportunity ceases to exist for non-spouse beneficiaries of retirement accounts in which the owner passes after December 31, 2019.
As with most retirement and tax legislation that goes into law, it will take some time to process all of the intricacies of the legislation, uncover unintended consequences and seek IRS guidance in certain situations. Your Madison team is busy doing just that; reading the literature we have access to, attending seminars/webinars and consulting with both tax and estate planning professionals to help you navigate the new rules with thoughtful, meaningful guidance.