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What is the SECURE Act?
In December 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law and took effect on January 1, 2020. Here is a summary of the changes that are expected to have the most impact on individual and company retirement accounts:
Required Minimum Distribution Age Increased to 72. Prior to the SECURE ACT, IRA owners were required to begin taking minimum distributions from their IRAs (and thus create taxable income) beginning at age 70.5. Now IRA account holders who did not reach age 70.5 in 2019, have until age 72 to begin required distributions. This gives account holders more time to delay taxable income and explore strategies such a Roth Conversions (realize income now and convert IRA to after tax funds). If you reached age 70.5 in 2019 and started your RMD but will not be age 72 in 2020, you still must proceed with taking a required distribution in 2020. Qualified Charitable Distributions up to $100,000 per year are still allowed from IRAs beginning at age 70.5.
Limitation of “Stretch IRA” Provision for Non-Spouse IRA Beneficiaries Before the SECURE ACT, non-spouse IRA beneficiaries could maintain the inherited account as an “Inherited IRA” and take annual required minimum distributions for the duration of their lives (“stretching the IRA”). This provision has been eliminated, and the IRA balance must now be fully distributed within 10 years of the death of the original owner. (All Inherited IRAs opened before 2020 will be grandfathered in and keep the historical distribution rules allowing to stretch out distributions). This abbreviated distribution timeline increases distributions and taxable income to the beneficiary. Exceptions to this new rule are beneficiaries who are spouses, minor children (until they reach age of majority), disabled individuals and people less than 10 years younger than the decedent.
These new rules complicate naming a trust as a beneficiary of an IRA. Conduit trusts are often used as beneficiaries of IRAs, allowing the IRA to make required distributions based on the oldest beneficiary of the trust. Based on the new rules, there will not be required distributions until the 10th year, requiring you to distribute the balance of the IRA and create taxable income at that time. One of the primary reasons people use trusts as the beneficiary of IRAs is to protect minor children. It is unclear how the IRS would treat these cases given that minors are exceptions to the rule when outright beneficiaries. If you have named a trust as the beneficiary of your IRA, you should review the intention and discuss with your estate attorney whether this strategy is still best.
Other Provisions (not all-encompassing)
Contributions to Traditional IRA accounts after age 70.5. Individuals may now contribute to individual retirement accounts at any age, as long as they have earned income.
Penalty Free withdrawals for birth/adoption expenses. New parents may now withdraw up to $5,000 from an IRA or company sponsored retirement plan to pay for birth/adoption expenses and avoid the 10% early withdrawal penalty. Income taxes are still due on the distribution.
Long-term part-time employees can participate in 401(k) plans. Employees who work at least 500 hours in at least three consecutive years are eligible to participate in their company’s 401(k) plan. Employers would not be required to make matching contributions.
Assets in 529 Savings Plans may now be used to repay up to $10,000 in student loans. Increase in Tax Credit for establishing a Small Business Retirement Plan The Tax credit was increased from $500 for 3 years to the greater of $500 or $250 times the number of non-highly compensated employees eligible to participate in the plan (limited to $5,000) for three years.
Increase in Tax Credit for establishing a Small Business Retirement Plan. The Tax credit was increased from $500 for 3 years to the greater of $500 or $250 times the number of non-highly compensated employees eligible to participate in the plan (limited to $5,000) for three years.
Required Minimum Distribution Age Increased to 72. Prior to the SECURE ACT, IRA owners were required to begin taking minimum distributions from their IRAs (and thus create taxable income) beginning at age 70.5. Now IRA account holders who did not reach age 70.5 in 2019, have until age 72 to begin required distributions. This gives account holders more time to delay taxable income and explore strategies such a Roth Conversions (realize income now and convert IRA to after tax funds). If you reached age 70.5 in 2019 and started your RMD but will not be age 72 in 2020, you still must proceed with taking a required distribution in 2020. Qualified Charitable Distributions up to $100,000 per year are still allowed from IRAs beginning at age 70.5.
Limitation of “Stretch IRA” Provision for Non-Spouse IRA Beneficiaries Before the SECURE ACT, non-spouse IRA beneficiaries could maintain the inherited account as an “Inherited IRA” and take annual required minimum distributions for the duration of their lives (“stretching the IRA”). This provision has been eliminated, and the IRA balance must now be fully distributed within 10 years of the death of the original owner. (All Inherited IRAs opened before 2020 will be grandfathered in and keep the historical distribution rules allowing to stretch out distributions). This abbreviated distribution timeline increases distributions and taxable income to the beneficiary. Exceptions to this new rule are beneficiaries who are spouses, minor children (until they reach age of majority), disabled individuals and people less than 10 years younger than the decedent.
These new rules complicate naming a trust as a beneficiary of an IRA. Conduit trusts are often used as beneficiaries of IRAs, allowing the IRA to make required distributions based on the oldest beneficiary of the trust. Based on the new rules, there will not be required distributions until the 10th year, requiring you to distribute the balance of the IRA and create taxable income at that time. One of the primary reasons people use trusts as the beneficiary of IRAs is to protect minor children. It is unclear how the IRS would treat these cases given that minors are exceptions to the rule when outright beneficiaries. If you have named a trust as the beneficiary of your IRA, you should review the intention and discuss with your estate attorney whether this strategy is still best.
Other Provisions (not all-encompassing)
Contributions to Traditional IRA accounts after age 70.5. Individuals may now contribute to individual retirement accounts at any age, as long as they have earned income.
Penalty Free withdrawals for birth/adoption expenses. New parents may now withdraw up to $5,000 from an IRA or company sponsored retirement plan to pay for birth/adoption expenses and avoid the 10% early withdrawal penalty. Income taxes are still due on the distribution.
Long-term part-time employees can participate in 401(k) plans. Employees who work at least 500 hours in at least three consecutive years are eligible to participate in their company’s 401(k) plan. Employers would not be required to make matching contributions.
Assets in 529 Savings Plans may now be used to repay up to $10,000 in student loans. Increase in Tax Credit for establishing a Small Business Retirement Plan The Tax credit was increased from $500 for 3 years to the greater of $500 or $250 times the number of non-highly compensated employees eligible to participate in the plan (limited to $5,000) for three years.
Increase in Tax Credit for establishing a Small Business Retirement Plan. The Tax credit was increased from $500 for 3 years to the greater of $500 or $250 times the number of non-highly compensated employees eligible to participate in the plan (limited to $5,000) for three years.
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