The Setting Every Community Up for Retirement Enhancement (SECURE) Act is now law. With it, comes some of the biggest changes to retirement savings law in recent years. These changes went into effect on January 1, 2020. While the new rules don’t appear to amount to a massive upheaval, the SECURE Act will require a change in strategy for many Americans. For others, it may reveal new opportunities. Independent Financial Advisors have an opportunity to work with their clients to navigate these changes. We have highlighted some of the most prominent changes here.
IRA Contributions and Distributions. A major change is the removal of the age limit for traditional IRA contributions. Before the SECURE Act, you were required to stop making contributions at age 70½. Now, you can continue to make contributions if you meet the earned-income requirement.
Another change that is part of the Act is that the required minimum distributions (RMD) from a traditional IRA must now begin at age 72, an increase from the prior 70½. If investors reach age 70½ in 2020, they may delay taking the first RMD on traditional IRAs until April 1 of the year after turning 72. If your client turned 70½ in 2019, they will still be required to take the first RMD by April 1, 2020. Allowing money to remain in a tax-deferred account for an additional 18 months (before needing to take an RMD) may alter some previous projections of your retirement income. 2
The Internal Revenue Service (IRS) has issued guidance around the RMD changes which are summarized in a FAQ section of the agency website. An IRS expert quoted in a Think Advisor article recommends that financial advisors contact all RMD clients affected and let them know about the RMD rule changes.
In addition, an individual will now be permitted to take a penalty-free “qualified birth or adoption distribution” of up to $5,000 from an eligible defined contribution plan or IRA upon the birth or adoption of a child. 1
529 Plan Distributions. The law expands the definition of a tax-free or qualified distribution from a 529 savings plan to include repayment of up to $10,000 in qualified student loans, and expenses for certain apprenticeship programs. The SECURE Act makes this change retroactive to distributions made after December 31, 2018.1
Limits on Stretch IRAs. The SECURE Act “modifies” the required minimum distribution rules regarding defined contribution plans and Individual Retirement Account (IRA) balances upon the death of the account owner. Under the new rules, distributions to non-spouse beneficiaries are generally required to be distributed by the end of the 10th calendar year following the year of the account owner’s death.1
It’s important to highlight that the new rule does not require the non-spouse beneficiary to take withdrawals during the 10-year period. But all the money must be withdrawn by the end of the 10th calendar year following the inheritance.
A surviving spouse of the IRA owner, disabled or chronically ill individuals, individuals who are not more than 10 years younger than the IRA owner, and child of the IRA owner who has not reached the age of majority may have other minimum distribution requirements.
Let’s say that a person has a hypothetical $1 million IRA. Under the new law, your non-spouse beneficiary may want to consider taking at least $100,000 a year for 10 years regardless of their age. For example, say you are leaving your IRA to a 50-year-old child. They must take all the money from the IRA by the time they reach age 61. Prior to the rule change, a 50-year-old child could “stretch” the money over their expected lifetime, or roughly 30 more years.
Multiple Employer Retirement Plans for Small Business. In terms of wide-ranging potential, the SECURE Act may offer its biggest change in the realm of multi-employer retirement plans. Previously, multiple employer plans were only open to employers within the same field or sharing some other “common characteristics.” Now, small businesses can buy into larger plans alongside other small businesses, without the prior limitations. This opens small businesses to a much wider field of options.1
Another big change for small business employer plans comes for part-time employees. Before the SECURE Act, these retirement plans were often not offered to employees who worked fewer than 1,000 hours in a year. Now, the door is open for employees who have either worked 1,000 hours in the space of one full year or to those who have worked at least 500 hours per year for three consecutive years.2
Additional SECURE Act provisions. There are additional changes provided in the SECURE Act which affect various client circumstances. The National Association of Plan Advisors prepared a table with descriptions and effective dates for the provisions at https://www.napa-net.org/news-info/daily-news/key-secure-act-provisions-and-effective-dates
While the SECURE Act represents some of the most significant change we have seen to the laws governing financial saving for retirement, it’s important to remember that these changes have been anticipated for a while now. The new limits on IRAs may force account owners to reconsider inheritance strategies and review how the accelerated income may affect a beneficiary’s tax situation. We suggest independent financial advisors seize this opportunity to help their valued clients navigate the changes.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. Copyright 2020 FMG Suite.
- house.gov, 2019 https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SECURE%20Act%20section%20by%20section.pdf
- Marketwatch, 2019