While most of us were enjoying the Holidays, our government was hard at work and on December 20, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act, was signed into law by President Trump. What does the SECURE Act mean for American savers, and for our DESMO clients? Mostly good news I am happy to report. We will communicate directly with our clients if any of these changes impact their financial plans. In the meantime, you can be confident that our financial planning technology already incorporates the changes included in the bill.
The bill is about 1700 pages long and it is quite broad, so we focus on most items we believe are of common interest across our audience. If you think that any of these changes and others you may have read about affect you, or you simply would like to learn more, don’t hesitate to contact us or your trusted advisor.
Elimination of the lifetime “stretch” provision for inherited IRA accounts
Under previous law, beneficiaries of an inherited IRA account had the option to withdraw from their accounts over their own life expectancy. With the SECURE Act, this provision still holds for spousal beneficiaries, but it is eliminated for non-spousal beneficiaries that inherit an IRA account starting in 2020. Instead, the SECURE Act introduces a new 10-Year rule. Under the 10-Year rule, the entire inherited retirement account must be emptied by the end of the 10th year following the year of inheritance. Within the 10-year period, there are no distribution requirements, so designated beneficiaries will have some flexibility in terms of the timing of the distributions.
Increased retirement savings incentives
Required Minimum Distribution Increased to Age 72
Previous law required that most individuals begin to take annual required minimum distributions (RMD) from their retirement accounts when they reached the age of 70½. Besides eliminating the confusing ½ year requirement, the SECURE Act delays this requirement to age 72. This gives savers additional tax-deferral benefits. The new law only applies to people who turn 70½ after December 31, 2019. If a person turned 70½ in 2019, the law does not apply—that person must take an RMD in 2019, 2020 and beyond.
Repealed maximum age for IRA contributions
The SECURE Act also repeals the maximum age for traditional IRA contributions. Previously, you could contribute to an IRA only if you were younger than 70½ years old. With the new law, you can continue to contribute to your IRA as long as you (or your spouse) have earned income. Repealing the limit allows workers to save longer for retirement, and even after withdrawals begin.
Qualified Charitable Distributions (QCD) still allowed at 70 and ½
Even though the RMD age has been increased to age 72, QCDs are allowed starting the year you turn 70 ½, as per the previous law.
A new exception to the early withdrawal penalty for childbirth and adoption
Section 113 of the Act introduces a new exception to the early withdrawal penalty for funds withdrawn to pay for expenses incurred through the first year after birth or adoption. The total amount with respect to any birth or adoption cannot exceed $5,000. Income taxes will apply to this amount, and the amount withdrawn can be contributed back to the plan.
Expansion of 529 plan qualified expenses
The SECURE Act expands the list of 529 qualified expenses. The Tax Cut and Jobs Act of 2017 already expanded 529 qualified expenses to include tuition at an elementary or secondary public, private, or religious school, up to $10,000 per tax year. The SECURE Act legislation further expands the list. First, the Act allows 529 funds to be used to pay for apprenticeship program expenses that include fees, books, supplies, and required equipment. In addition, as much as $10,000 over a person’s lifetime can be used for qualified student loan payments.
Incentives for small employers to offer retirement plans
Tax Incentives
Employers with fewer than 100 employees are eligible for a 50% tax credit for retirement plan startup costs as high as $5,000. This is much bigger than the previous incentive, capped at $500. In addition, since auto-enrollment is a proven way to increase employee participation, small employers can receive a credit of up to $500 a year for up to three years for including automatic enrollment in their plans.
Multi-employer plans
The Act also includes a provision that makes it easier for employers to join together in multiple-employer plans (MEPs), effective 2021. These arrangements allow small firms to reach a scale that could increase their negotiating power with providers and at the same time reduce administrative and compliance costs. Section 101 of the Act stipulates that in the event a single employer fails to fulfill obligations, the IRS can essentially disqualify that employer’s portion of the plan, while allowing the MEP to maintain its qualified status. For employers to benefit from the new MEP rules provided for by the SECURE Act, the MEP will have to be administered by a “Pooled Plan Provider”, such as a Registered Investment Advisor.
Feel free to contact or schedule a call if you have any questions about these changes and how they may affect your plan. We are here to serve you!
Until Next Time!
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Massi De Santis is an Austin, TX fee-only financial planner. DESMO Wealth Advisors, LLC provides objective financial planning and investment management to help clients organize, grow and protect their resources throughout their lives. As a fee-only, fiduciary, and independent financial advisor, Massi De Santis is never paid a commission of any kind, and has a legal obligation to provide unbiased and trustworthy financial advice.
