• the SECURE Act of 2019 became law on December 20, 2019
• SECURE  — Setting Every Community Up for Retirement Enhancement
• Let’s break down the key changes, most of which benefit retirement savers

Today I’ll summarize the key changes and assess the impact to taxes. The Act has a large number of provisions. I’ll focus on the most relevant changes. A complete table of the Act’s provisions and effective dates can be found here.

Increases RMD Age From 70 ½ to 72 For All Retirement Accounts

For Americans living longer with taxable retirement saving, this will provide more flexibility regarding timing of distributions from retirement accounts which have Required Minimum Distributions (RMDs). This applies to individuals that have not reached the age of 70 ½ by December 31, 2019. Given a push out in when RMDs must start, the case for converting a traditional IRA to a ROTH IRA may be more attractive.

In addition, for retirees that continue to earn income beyond age 70 1/2, they can now contribute to retirement savings accounts.

401k Plans For Part-Time Employees

Previously, part-time employees could be excluded from 401k plans.  Under new rules certain part-time employees cannot be excluded.  Check this link for details.

Limits Liability For Annuities in 401k Plans

This is a ‘safe harbor’ provision to limit company liability. The plan sponsor (e.g. employer) is still required to do due diligence as a fiduciary when selecting the insurance company and the annuity option. The employer is not required to select the lowest cost contract.

This provision has been widely discussed. Yes, it provides more options for 401k participants. That said, understanding if and when an annuity makes sense for an individual is very complicated. To make a prudent decision, I would recommend that one has a financial plan and scenario analysis to understand if and when an annuity helps ones retirement plan confidence. Certain annuities such as immediate payment or deferred payment annuities with very low expense ratios may play a part in a high confidence retirement plan. Still, most simulations show that an allocation of < 20% is optimal. The benefit provided is reduced longevity risk. A wide range of annuities outside of these types of annuities would typically be much more complex to evaluate and typically have higher fees.

Before considering an annuity in your 401k, I would strongly recommend getting an annuity opinion from your own fiduciary. Some have been critical of this provision because there was a strong lobby effort by insurance companies to get this included.

Inherited IRAs Require All Funds To Be Withdrawn Within 10 Years

Previously, one option available for inherited IRA holders, would be to take withdrawals over recipients lifetime. Now, they must be taken out within 10 years. These inherited IRAs were sometimes called, ‘Stretch IRAs’, given the ability to spread out the distribution. The provision is not retroactive, so it will not affect anyone who inherited an IRA prior to Jan 1, 2020. There are some exceptions for surviving spouse, minor children, disabled or chronically ill individuals and those who are within 10 years of age of the donor of the IRA.

Important point: If you have named a trust as your retirement account beneficiary, you should review (and possibly revise) the trust or modify the beneficiary. Under the old laws, a properly structured trust could be used to spread out trust beneficiary distributions over a long period. Under the new laws, this would not be allowed, consult your trust attorney to review this case.

Penalty-Free Withdrawals For Birth or Adoption

Under the old law, any withdrawal prior to age 59 ½ would incur a 10% penalty. This change does not apply to defined benefit plans. The withdrawal must occur with the first year of the child’s birth. Repayment to the IRA will be allowed and treated as an eligible rollover. The withdrawals are limited to $5,000 over lifetime.

Multiple Employer Plans

This provision allows two or more unrelated employers to join a pooled employer plan. This goes into effect December 21, 2020.

This is an interesting development for a few reasons. First, having reviewed a large number of small company 401k plans, my experience is that the smaller the 401k plan the higher the expense ratios on the funds and the smaller the number of good fund options.

In theory, this could enable better economy of scale, more fund choices and lower expenses for small businesses.

Expands Use of 529 Plans For Student Loan Repayment

Funds in 529 plans can now be used to repay up to $10,000 in student loans, as well as for siblings student loans.

Conclusion

The SECURE Act has a variety of changes that mostly create benefits for retirement savers. As noted, the requirement to withdraw inherited IRA funds within 10 years is not as favorable as the old rules and worse yet, may trigger those with trusts as a beneficiary to their IRA to require a legal review and or trust restricting. It will take time and cost to change these structures.

Generally, for clients we will factor all of these provisions into our financial planning and income plan process. That said, if you have specific questions please give me a call any time to discuss.