The SECURE Act - A Quick Primer
Updated: May 21, 2020
On December 20 2019, as part of the year-end spending bill, President Trump signed the SECURE (Setting Every Community Up for Retirement Enhancement) Act into law. This Act goes into effect on January 1, 2020.
Intent of the SECURE legislation is to strengthen retirement security of American workers. There are initial conflicting opinions on how large an actual impact it will have on the work force. However, these changes create many planning opportunities for us individual investors and somethings we need to be aware of and plan for.
Following is not a complete or exhaustive list of all the changes. These are just some of the changes I believe will impact many of us.
Increase in the Required Minimum Distribution (RMD) age: Previously, individuals with 401(k)s or IRAs had to withdraw required minimum distributions (RMD) in the year they turn age 70½. The SECURE Act increases this age to 72. People turning 70.5 years old in 2019 will still need to withdraw their RMD this year. Failure to do so would result in a 50% penalty of their RMD. However, those turning 70.5 years in 2020 will not be required to withdraw RMDs until they are 72.
Traditional IRA contribution age increase: The SECURE Act eliminates the maximum age for traditional IRA contributions. Previous rule prohibited contributions to a traditional IRA for those of age 70½ and older. Now one can continue to contribute to a traditional IRA if one is working into 70s and beyond.
Inherited IRA distributions: A new "10-Year Rule" abolishes the so-called "Stretch IRA". Old rule allowed beneficiaries of inherited retirement plans to stretch distributions over their lifetimes. Starting in 2020, beneficiaries must now fully distribute the entire value of their inherited retirement accounts within ten years. This 10-Year Rule applies to all types of inherited retirement plans, including IRAs, 401(k) plans, 403(b) plans, and even Roth IRAs opened after 12/31/2019. There are few exceptions to this 10-Year Rule. It does not apply to a beneficiary who is a surviving spouse, disabled person, a chronically ill person, a minor child or someone fewer than 10 years younger than the original IRA owner. For minors, the exception only applies until the child reaches the age of majority. At that point, the 10-year Rule kicks in.
Annuities in 401(k) plans: The SECURE Act makes it easier for employers to offer annuities as investment options within 401(k) plans. While annuities provide a guaranteed income over the course of a retiree’s lifetime, they are complex investment products and hence a due-diligence must be done before making a decision.
401(k)s for part-time employees: The new law guarantees 401(k) plan eligibility for employees who have worked at least 500 hours/year for at least three consecutive years. Employee needs to be 21 years old by the end of the three-year period. This new rule does not apply to collectively bargained employees.
There are few non-retirement changes that impact our planning as well. Couple of these are:
529 plans to repay student loan debt: The SECURE Act allows families to take tax-free distributions from a 529 plan for student loan repayment. There is an aggregate lifetime limit of $10,000 in qualified student loan repayments per 529 plan beneficiary and $10,000 per each of the beneficiary's siblings. This expansion also presents an opportunity for planning for grandparents who want to help a grandchild pay for college without affecting financial aid eligibility.
The Kiddie Tax: The Kiddie Tax is the tax imposed on a child's passive income from dividends, capital gains, taxable interest, taxable scholarships and income from gifts and custodial accounts. Prior to The Tax Cuts and Jobs Act (TCJA) of 2017, Kiddie Tax was at the tax rates of the child’s parents. Post-TCJA (starting in 2018), the Kiddie Tax was based on the much higher tax rates for estates and trusts. The SECURE Act also includes changes that lower the Kiddie Tax to pre-TCJA rates.