Is the SECURE Act a Gift or a Lump of Coal?

As 2019 was drawing to a close, many people missed the Christmas present Congress gave us in the form of major tax law change passed on Friday, December 20, 2019: the SECURE Act (Setting Every Community Up for Retirement Enhancement Act).

This new legislation affects current retirement and estate planning in many ways. Ultimately, its intent is to make it easier for families to save more for retirement. As more Americans are living longer, working longer, and increasingly responsible for funding their own retirement, the SECURE Act aims to strengthen retirement security across the country.

What are the Major Changes?  

Stretch IRA’s Repealed   Starting in 2020, most non-spouse beneficiaries inheriting retirement accounts must have the entire account distributed to them within ten years.  Prior to the SECURE Act, inherited retirement account distributions could be “stretched” over the beneficiary’s lifetime. Some beneficiaries, however, are exempt from the 10-year distribution requirement (and can instead distribute the account over their lifetimes):

  • A non-spouse beneficiary not more than 10 years younger than the decedent;
  • A disabled beneficiary;
  • A chronically ill beneficiary; and
  • A minor child of the decedent under age 18 (but the 10-year period starts once the beneficiary turns 18).

Spousal beneficiaries and IRAs inherited prior to 2020 do not have the accelerated distribution requirements of The SECURE Act.

Required Minimum Distributions (RMD)  RMD’s begin at age 72.  Prior to 2020, owners of most retirement plans had to withdraw a proportion of their retirement accounts each year starting in the year they turned age 70½. Distributions now need not start until age 72.   If you turned 70 ½ prior to January 1, 2020, you cannot delay distributions until age 72.    (The IRS has proposed new distribution tables for 2021 that unfortunately will only result in very small reductions to the required minimum distribution.)

Traditional IRA Contribution Age Prohibition at Age 70 ½ Repealed   Working individuals can make regular IRA contributions for as long as they are working.  Previously, only Roth IRA contributions could be made once you reached age 70 ½.

Qualified Charitable Distributions Still Allowed at Age 70 ½   Even though RMD’s can be postponed until age 72, individuals age 70 ½ may still make charitable contributions from their IRA and receive tax benefits from those contributions.

Qualified Birth or Adoption Distributions   Exemption from the 10% penalty for withdrawals for childbirth or adoption.  The new law allows parents to withdraw up to $5,000 for childbirth or adoption within one year of the birth or finalized adoption date of an individual under the age of 18.

There are several additional benefits, such as:

  • Tax credits for small businesses that establish retirement plans
  • Tax credits for retirement plan adoption of auto-enrollment of participants
  • Some long-term, part-time workers can now participate in 401(k) plans
  • Employers may adopt employer-funded plans effective for the prior year as late as the due date of the employer’s tax return
  • Various annuity flexibilities are now allowed; employers and fiduciaries are afforded more liability protection when they offer annuities in their retirement plans and the ability to make tax-free rollovers of discontinued annuities from retirement plans
  • Employers who “auto-enroll” employees utilizing a Qualified Automatic Contribution Arrangement (QACA) safe harbor plan are allowed to increase the cap on contributions from 10% of employee compensation up to 15%, with an opt-out option
  • IRA contributions can be made with taxable non-tuition fellowship and stipend payments to graduate and post graduate students
  • Non-deductible contributions can be made with certain foster care payments
  • Distribution of qualified 401(k) plan loans via credit cards is prohibited
  • “Kiddie Tax” reverts applicable children’s income to be subject to parents’ marginal tax rate
  • 529 plans can now pay up to $10,000 for student loans and certified apprenticeships
  • Medical deduction AGI (adjusted gross income) limit remains at 7.5% through 2020

The SECURE Act touches on a broad array of retirement initiatives. The outline above is simplified and notes the highlights of these sweeping legislative changes. We encourage you to work with us and your tax advisor before making changes to your financial situation.