SECURE Act – What’s Changed?

The Setting Every Community Up for Retirement Enhancement Act, or SECURE Act, was officially approved by the Senate and signed by President Trump during the final weeks of 2019. While much has been written, discussed and debated about the merits of the new Act, it includes significant provisions that improve access to retirement accounts, prevent retirees from outliving their assets and broaden the usefulness of tax-advantaged accounts.

As expected when the rules change late in the game, we continue to receive calls and questions from our clients who are confused about the Act and the impact it will have on their retirement. In order to keep our readers informed and engaged, we have planned multiple assessments on the Act to share with our clients. My colleague, Rosie Hall, will address the specific impact on retirement plans in this month’s Perspectives. Our Senior Trust Advisor, George Bearup, will also discuss wealth & estate planning opportunities for consideration under the SECURE Act in next month’s edition. In order to provide a broad summary of the new law, what follows is a review of the most significant changes caused by the SECURE Act.

Age Limits: The SECURE Act repeals the prior limitation of a person age 70 or over to contribute to an IRA. An IRA contribution can only be made with earned income, but individuals over the age of 70 who are still working, either self-employed or part-time, can now make tax deductible contributions to an IRA.

Required Beginning Date: The required beginning date for when an individual must begin to withdraw funds from their IRAs and qualified plan accounts (commonly referred to as a required minimum distribution) has been increased from age 70½ to 72. This means that a worker who has attained age 70½ in 2020 will have until age 72 to take their first required minimum distribution.

Stretch IRA Eliminated: The ability to withdraw from an inherited IRA or retirement account over a beneficiary’s lifetime was, in general, eliminated under the SECURE Act. The new rule requires an inherited IRA to be ‘emptied’ within ten years of the IRA owner’s death. Unlike the old RMD rules that mandated a distribution from the inherited retirement account each year, under the new ten-year distribution rule, the inherited funds can be retained in the IRA, growing tax deferred, until the tenth year after the retirement account owner’s death, when the balance must then be distributed. A delay in taking a distribution to the tenth year could expose that distribution to much higher marginal income tax rates due to ‘bunching’ all that ordinary income into a single taxable year. This change is effective for individuals who die after December 31, 2019 – which means that existing inherited IRA owners will continue to be able to take distributions over their life expectancy.

Exceptions exist to this 10-year payout rule for designated beneficiaries who are the IRA owner’s spouse, minor children, disabled or chronically ill individuals, or an individual who is not more than ten years younger than the IRA owner. An eligible designated beneficiary may take distributions from the inherited IRA over his or her life expectancy. When a minor child reaches the age of majority, typically 18-21, any remaining balance of the inherited IRA must be distributed within ten years from that date.

Encouraging More Workplace Retirement Plans: While small employers have been encouraged over the years to sponsor ‘cheap’ qualified plans, (SIMPLE IRAs, SEP IRAs), those options have not attracted much interest from small employers. As a result, new opportunities and inducements were created by the Act to encourage the adoption of qualified retirement plans. Called open multiple employer plans (or MEPs), the law will now permit multiple small employers to adopt a single qualified plan. The obvious goal is to spread the administrative cost to maintain a qualified plan over several employers, thus making those annual expenses associated with a qualified plan less cost-prohibitive.

Informing Participants: The Act requires qualified plan participants to receive annual illustrations of how much monthly income their retirement savings will provide after they retire. This information is intended to make plan participants better informed and to encourage them to save more for their retirement.

Annuities: The Act expands the opportunities for plan participants to obtain guaranteed lifetime income, through the purchase of an annuity held inside their retirement plan account. Employers have historically been cautious about including annuities in retirement plans due to the potential for liability. Under the Act, any problems or issues that the plan participant has with the annuity investment option must be taken up directly with the annuity company, not the plan sponsor. The plan sponsor is only required to perform due diligence in the selection of the annuity provider.

529 Plans: As part of the new law, 529 accounts can be used to pay for home schooling expenses, depending upon state law. In addition, the definition of higher education expenses was expanded to permit 529 accounts to be used for trade school expenses. 529 plan account owners may also now withdraw up to $10,000, tax-free, for payments toward qualified education loans.

Kiddie Tax: The 2017 Tax Act changed the rules for the taxation of a child’s non-earned income, exposing that income to the tax rates of estate and trusts, which were exceptionally high. The SECURE Act repealed that change. We are now back to the pre-2018 rules, where a child’s passive income will be taxed at the child’s parents’ highest marginal income tax bracket.

Birth or Adoption Expenses: If distributions are taken from an IRA for birth or adoption expenses, up to $5,000, that distribution will be exempt from the 10% penalty for early distributions prior to age 59½. The distribution must be within one year of the date of the child’s birth or legal adoption. The amount withdrawn can also be repaid at a future date (i.e. re-contributed back into any retirement account). Note, however, that the distribution will still be taxable; it is just the 10% penalty that is avoided.

Fellowship & Stipend Income: Taxable non-tuition fellowship and stipend payments will be treated as earned income, in order to permit the recipient to contribute to a traditional IRA or a Roth IRA.

We remain committed to helping our clients navigate these widespread changes and enhancements. Stay tuned for future updates from your Greenleaf Trust team regarding the SECURE Act. As always, please contact a member of your client centric team if you wish to discuss any of these extensive changes in greater detail.