Significant Retirement Changes under the SECURE ACT

January 13, 2020

As 2019 came to a close, the president signed into law the SECURE Act, which stands for “Setting Every Community Up for Retirement Enhancement.” The law, which took full effect on January 1, 2020 with the exception of just a handful of provisions, stands for more than just a catchy acronym—the SECURE Act could have significant impacts on an individual’s or business’s retirement plan. Below is a summary of some of the legislation’s key elements that you should consider in your retirement planning:

Repeal of the IRA Contribution Age Restriction
The SECURE Act removes the provision preventing individuals age 70½ and older from making traditional IRA contributions. Thus, anyone of any age can contribute. This repeal does not affect Roth IRA contributions, as there was never an age cap for those. To make any type of IRA contribution, the taxpayer must have earned income of at least the IRA contribution amount. Earned income for IRA purposes includes wages, self-employment income, any other income on which employment taxes are paid, and alimony.

Required Minimum Distributions (RMD) Taken Later
The SECURE Act raises the age at which a retirement account holder is required to take withdrawals from age 70½ to age 72. All other rules surrounding the RMD remain the same.

Removal of Stretch IRAs
Prior to the SECURE Act, an individual who inherited a traditional IRA was able to take required minimum distributions over his/her lifetime. The SECURE Act does away with required minimum distributions, but now requires beneficiaries to withdraw the inherited IRA within 10 years. This provision was included in the SECURE Act to raise the estimated nearly $16 billion reduction to tax revenue, due to other provisions of the law. Typically, IRAs are inherited during the beneficiary’s peak earnings years, making withdrawals over this shortened period potentially subject to more income tax. In response to the SECURE Act, the IRA owner, as part of their estate planning, should consider whether converting some or all of their traditional IRA to a Roth IRA would be a beneficial move. Yes, income taxes would be due at that time, but it may be at a lower tax rate than that of the beneficiaries.

Retirement Assets Can Be Used for a New Child
Have a baby on the way or an adoption in progress? Such taxpayers can withdraw up to $5,000 from an IRA or 401(k) without the 10% early withdrawal penalty. The withdrawal is still subject to income tax unless the funds are put back into another IRA. Note that putting the funds back will count as a rollover and only one is permitted within a 12-month period. The penalty-free provision applies for withdrawals occurring up to one year from the date the child is born or adoption is finalized. An adoptee must be age 17 or younger and cannot be the child of your spouse.

401(k) Eligibility
Prior to the SECURE Act, employers were able to exclude employees who worked less than 1,000 hours from being able to participate in the company-sponsored 401(k) retirement plan. The new legislation lowers the hour limit to 500. Starting in 2021, the most restrictive entrance bar is limited to a worker who is at least 21-years-old and worked at least 500 hours each year during the preceding three years.

Understanding How Long a 401(k) Will Last
Plan administrators will need to provide a participant annually with a statement illustrating the possible monthly payout and how long that will last, if the participant invested the entire plan balance into an annuity. This provision does not take effect until one year from the date the IRS releases guidance or rules on the matter, which means that it could be a while. Once in place, this provision will undoubtedly provide a wake-up call to many in their understanding of what their retirement account really means in terms of being able to actually retire.

Annuities Within a 401(k)
Although 401(k) plans have been able to offer annuities and other lifetime guaranteed income, such offerings were fraught with legal risks to the plan sponsor. Such risks have been reduced under the SECURE Act, along with the ability for the annuity to be portable, free of transfer fees, and surrender charges. An annuity within a 401(k) does not accomplish anything that an annuity held outside of a plan would do, save for the deductibility of the annuity purchase. Buying an annuity outside a 401(k) plan is done with post-tax (nondeductible) dollars, while a purchase inside the plan is done with pre-tax dollars. Both have the same major advantage of the annuity growing tax-deferred.

Credits to Businesses
A small business gets a helping hand in the form of two tax credits under the SECURE Act. The existing maximum $500 credit to pay for half of the retirement plan’s start-up costs is increased to $5,000. In addition to this credit, a new $500 credit against start-up costs is available for plans that include an automatic enrollment feature.

529 Plan Withdrawals
The SECURE Act expands qualified (not taxed) 529 plan withdrawals to encompass up to $10,000 used to repay qualified student loans, as well as for curtained apprenticeship program expenses. This provision is retroactive to January 1, 2019. Thus, those with 529 plan balances that may not otherwise be needed can withdraw up to $10,000 before 2019 is over and do it again in 2020.

For questions about the how the SECURE Act impacts you or other tax-related matters, please contact Larry Rubin at 301.222.8212.