Breaking The Code: The SECURE Act
By: Jeffrey M. Krueger, CPA, MSA, CFP®
On December 20th, President Trump signed into law the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The new law took effect as of January 1, 2020 and puts into place a number of changes for retirement plans and retirees. While the changes are quite modest for most, below is a summary of some of the key changes:
Elimination of the Stretch IRA
Pre-SECURE Act: Funds left in retirement accounts to non-spouse beneficiaries at death could be distributed out over the life of the beneficiary.
Post-SECURE Act: No changes to current inherited IRA owners. For new inherited retirement accounts set up after 2019, beneficiaries will be required to distribute out the funds by the end of the 10th year. Note that no RMDs are required during this time (i.e. the entire balance could be taken out in year 10, or years 8/9/10 to manage the tax implications). Certain exceptions apply for “eligible designated beneficiary”, defined as: a surviving spouse; a disabled individual; someone who is chronically ill; a minor child of the deceased account owner (until they turn 18); and a beneficiary who is not more than 10 years younger than the deceased account owner).
Potential Planning Items:
Estate plans will need to be reviewed.
Trust planning may be simplified through the use of accumulation trusts vs. conduit trusts.
Review tax brackets of IRA holders and beneficiaries to see if Roth conversions make sense.
Increase in RMD Age from 70 ½ to 72
Pre-SECURE Act: Retirees were required to begin taking minimum distributions by April 1 of the year following attainment of age 70.5.
Post-SECURE Act: Retirees will be required to begin taking minimum distributions by April 1 of the year following attainment of age 72. If a retiree had turned 70.5 by 12/31/19, they are required to take the minimum distribution by April 1 of the following year.
Potential Planning Items:
Retirees can defer taking distributions for their retirement accounts for an extra year or two, depending on birth month.
Can Contribute to Traditional IRA after Age 70
Pre-SECURE Act: Individuals were not eligible to contribute to Traditional IRA in the year they attained age 70.5 or any later year.
Post-SECURE Act: If you have earned income, you can contribute to a Traditional IRA. A side effect of a post age 70.5 deductible contribution is that the aggregate amount of these deductions will reduce the annual Qualified Charitable Distribution allowance.
Potential Planning Items:
Review with your CPA to see if worth taking advantage of this deduction.
Multiple Employer Plans for Small Businesses
Pre-SECURE Act: There were various rules for multiple employer plans that were revised. The main rules were the “one bad apple” rule and nexus requirement. Under the “one bad apple rule”, if one employer did not meet plan requirements, the plan would fail for everybody. The nexus mandate required the unrelated employers to have nexus or a common interest, such as being in the same industry.
Post-SECURE Act: The regulations around these plans were eased, to more easily allow small businesses to pool their plans. This, in turn, reduces the cost and administrative burden to employers, in hopes of incentivizing retirement plans to more employees.
The SECURE act also increases the tax credits for business owners’ plan start-up costs for the first three years beginning in 2020 (up to $5,000). There is also an additional credit of $500 for small business plans with an auto-enrollment feature.
Potential Planning Items:
Small business owners who are interested in offering a retirement plan should talk with their CPAs, financial advisors, and third-party administrators to review their options and costs.
Financial Advisors may be able to greatly help their small business clients by having one exceptional, low-cost 401(k) plan that they can offer to any business they work with (or wants to work with them). This could streamline things for advisors and should lead to cost efficiencies for their clients.
Annuities in Retirement Plans
Post-SECURE Act: There were two changes that make it easier to sell annuities inside of qualified plans.
Fiduciary Safe Harbor: Section 204 provides a new safe harbor for selecting an annuity provider, thus lowering the risk of a plan participant from coming back and suing the fiduciary of the plan if the insurance company cannot pay on the annuity promised.
Portability: In short, if a plan wants to take out an annuity option, the participant is no longer required to liquidate the annuity, and instead, can roll it out of the plan “in-kind.”
Potential Planning Items:
Lifetime income annuities can help mitigate longevity risk. Adding these options to retirement plans can help retirees mimic pension like distributions. However, not all annuities are great and some of these products have a greater potential for abuse. Review the options with a qualified, impartial professional.
Other Changes
Individuals are now able to pay off $10k of student loans with 529 Plan dollars.
Potential Planning Item: Individuals may have some state tax savings by contributing to 529 to then pay off student loans. For MA, the $500 in state tax savings over 5 years ($100/year) is likely not worth the administrative hassle.
New exception to early retirement penalty waivers for birth of new child or adoption (up to $5k).
Kiddie Tax will revert to using the parent’s tax rates starting in 2020. The TCJA previously had changed to use trust tax brackets in 2019.
Part-time workers must now be eligible for the retirement plan if they work 500 hours in 3 consecutive years (or 1,000 hours in a single year).
Automatic enrollment percentage increased. Employers can now automatically enroll employees to contribute up to 15% of income (formerly 10%).
Employer contribution-only plans can be adopted after the end of the calendar year.
Qualified medical expense itemized deductions are allowed above 7.5% of AGI (formerly 10%).
Amounts paid to assist with graduate studies or research, such as fellowships or stipends, will be treated as compensation for purposes of making IRA contributions.
To ensure compliance with the requirements imposed on us by IRS Circular 230, we inform you that any tax advice contained in this communication (including any attachments) is not intended to and cannot be used for the purpose of: (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.