The SECURE Act

Posted On: June 2020

What it means for your retirement and estate plans

The Setting Every Community Up for Retirement Enhancement (SECURE) Act is one of the most significant pieces of retirement plan legislation in years. In addition to affecting your retirement planning strategies, the new law may also impact your estate plan, especially if your beneficiaries will inherit IRAs or employer-provided retirement accounts.

Summary of key changes

Most of the SECURE Act’s reforms are designed to make it easier for people to save for retirement and to improve the accessibility of tax-advantaged retirement savings vehicles, such as 401(k) plans and IRAs.

Here is a brief look at the most important changes for individuals:

RMDs delayed. Required minimum distributions (RMDs) from traditional IRAs and defined contribution qualified plans — such as 401(k) plans — now must begin by April 1 of the year after the participant reaches age 72 (up from age 70½).

This change applies only to people who turn 70½ on January 1, 2020, or later. If you reached that age earlier, you must continue to take RMDs under the old rules. If you will turn 70½ this year and had planned to take an RMD for this year, talk to us about adjusting your withdrawal schedule.

No age limits on IRA contributions. Previously, traditional IRA contributions were prohibited beyond age 70½. Recognizing that people are more likely to work beyond the customary retirement age, the new law eliminates this restriction for tax years beginning after 2019. Now, so long as you otherwise meet the requirements, you can continue to contribute to your traditional IRA, regardless of your age. Depending on your retirement readiness, you may want to revisit your timeline and savings strategies considering this change.

401(k) plans for part-time employees. Previously, part-time employees who worked less than 1,000 hours per year generally were ineligible to participate in their employers’ 401(k) plans. Now, except for certain collectively bargained plans, employers with 401(k) plans must allow certain long-term, part-time employees to participate. Eligible part-time employees are those who are at least age 21 and worked 500 hours or more in each of the previous three years. If you work part-time, find out whether you are eligible to enroll in your employer’s 401(k) plan.

No more stretch IRAs. Not all of the SECURE Act’s changes are good news. Previously, individuals who inherited IRAs or 401(k) accounts (rolled into an inherited IRA) from someone other than their spouse (a parent or grandparent, for example) could “stretch” RMDs over their own life expectancies, maximizing the benefits of tax-deferred growth. Under the new law, those distributions must now be completed within 10 years. There are a few exceptions: For minor children who inherit IRAs or 401(k)s, the 10-year payout period does not begin until they reach the age of majority. And stretch IRAs are still available to beneficiaries who are disabled or chronically ill, or who are less than 10 years younger than you. As before, spouses who inherit an IRA or 401(k) plan can elect to roll the funds over into their own IRAs and allow the funds to continue growing tax-deferred until they choose to begin withdrawing the funds in retirement or must take RMDs.

Impact on estate planning

If you have an IRA or 401(k) account that you had planned to leave to nonspousal beneficiaries based on the previous rules, revisit your retirement and estate planning strategies with consideration of the new rules. Without the tax-deferring power of a stretch IRA, you may want to look at other strategies for reducing the tax impact on your heirs, such as a Roth IRA conversion. Although you will owe taxes on the amount you convert (to the extent they are attributable to earnings and deductible contributions), your heirs will be able to withdraw the funds tax-free. Note, however, that inherited Roth IRAs are also subject to the 10-year rule with respect to distributions.

You should also consider the use of certain trusts designed to hold inherited IRAs, such as “conduit” or “see-through” trusts. Previously, IRAs held in such trusts could be distributed over a beneficiary’s life expectancy, but now they must be distributed within 10 years.

Review your plans

The changes made by the SECURE Act may have an impact on your retirement and estate plans. We can help you review your plans to ensure that they continue to meet your objectives.

Sidebar: Benefits for small business owners

The Setting Every Community Up for Retirement Enhancement (SECURE) Act contains several provisions that may reduce the cost of sponsoring a qualified plan, making it easier for small business owners to provide retirement benefits for themselves and their employees. Key provisions include:

  • Creation of pooled employer plans, starting next year, which enable unrelated employers to join multiple employer plans (MEPs) sponsored by financial institutions and other providers, taking advantage of economies of scale; the act also eliminates the “one bad apple” rule, which disqualified a MEP if one employer failed to qualify,
  • An increase in the maximum tax credit for certain retirement plan start-up expenses, from $500 to $5,000 per year, for up to three years, and
  • A $500 credit per year, for up to three years, for employers that add automatic enrollment to their 401(k) or SIMPLE IRA plans.

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