The SECURE Act and What it Means For You and Your Family

value financial advisor
By Joe Globensky, RFC®

The SECURE Act

On Friday, December 20, 2019, President Trump signed into law the most impactful retirement legislation in decades.  The Setting Every Community Up for Retirement Enhancement (SECURE) Act had overwhelming bipartisan support in both the House and Senate.  The SECURE Act is designed to encourage more businesses to offer a retirement plan to their employees and encourage employees to save more for retirement.

And most retirement savers, and inheritors, will be affected.  But not all the new rules will be helpful.  The potential consequences of this Act are so important, we will be hosting several educational workshops in the months ahead.  More on those workshops later.  For now, let’s cover the most significant changes resulting from the SECURE Act.

Eliminating the Stretch IRA

One of the most significant changes made by the SECURE Act is the elimination of the “Stretch” provisions for most non-spouse beneficiaries of defined contribution plans and IRA accounts.  The “Stretch” provisions allowed beneficiaries to take distributions from the account based on their life expectancy, thereby also “stretching” the tax burden.  For most designated non-spouse beneficiaries who inherit in 2020, the new standard under the SECURE Act will be the “10-Year Rule.”

Under the 10-Year Rule, the entire inherited retirement account must be distributed by the end of the 10thyear following the year of inheritance.  Within the 10-year period, there are no distribution requirements.  So, designated beneficiaries will have some flexibility when it comes to timing distributions for maximum tax efficiency, as long as the entire account balance has been taken by the end of the 10th year.

This elimination brings about a number of planning challenges.  For many beneficiaries, this will come at a time of “peak” earnings, thereby causing a larger tax burden on all income.  This could also affect taxes on Social Security benefits, and potentially lead to income penalties for Medicare Parts B and D.  It can also affect subsidies received on health insurance policies purchased through the federal marketplace.  This will also unfavorably impact most trusts that were established for purposes of passing on retirement account balances.

Note: Governmental plans, such as 403(b) and 457 plans sponsored by state and local governments, and the Thrift Savings Plan sponsored by the Federal government are not impacted until January 1, 2022.

If your intention is to transfer your retirement plan to a younger generation, either at your death or your spouse’s, there may be planning opportunities available to you that will keep more money in the hands of your beneficiaries rather than Uncle Sam.  The sooner you start planning, the better.

New Age Requirements for Required Minimum Distributions (RMDs)

Another big change from the SECURE Act is a shift to push back the onset of RMDs from age 70 ½ to age 72.  While this does not seem like a big change, any relief is welcome news for those who don’t want RMDs and will only take the money if they are forced to.  It’s also much easier to figure out when you turn 72 than 70 ½, therefore it will be much easier to determine your required beginning date and your life expectancy withdrawal rate.

NOTE: This change only applies to those individuals who turn 70 ½ in 2020 or later.  In other words, if you turned 70 ½ prior to January 1, 2020, you are still required to start/continue RMDs under the existing rules. 

Traditional IRA Contributions No Longer Prohibited at Age 70 ½ and Beyond

The SECURE Act recognizes that more Americans are living longer and working past normal retirement age.  As a result, beginning in 2020, the Act permits individuals of any age to contribute to a Traditional IRA.  But, the requirement that such individuals, or their spouses, have earned income from either wages or self-employment still remains.

Tax Incentives for Small Business Owners

The SECURE Act has increased the tax incentives for small business owners in order to offset some of the upfront costs of offering a qualified retirement plan, as well as increase plan participation and retirement savings rates among employees.

Small businesses can receive a tax credit for retirement plan start-up costs up to $5,000.  An additional tax credit of $500 a year for three years is available if the plan offers automatic enrollment.  Eligible employees will be automatically enrolled in the plan and will have to affirmatively elect out if they do not want to participate. 

Looser Restrictions on Retirement Plan Eligibility

Up until now, employers could generally exclude employees with less than 1,000 hours worked in a calendar year from their qualified plan, thereby preventing part-time workers from participating in the plan.  The SECURE Act has created the ability for long-term part-time workers to participate in the future.  Employees will now be eligible to participate if they have worked at least 500 hours in at least three consecutive years.

Unfortunately, this change applies to plan years beginning in 2021.  Also, the SECURE Act does not require employers to begin counting the three-year requirement until 2021.  So, the earliest an employee will be able to participate in a qualified retirement plan as a result of this change will be 2024, but it is coming.

Access to Annuities and Lifetime Income Options in Retirement Plans

With fewer pension plans being offered by private employers, and employees’ increased self-reliance on saving for retirement, there was a desire to add annuities, particularly those offering guaranteed lifetime income, to employer-sponsored retirement plans.  Two reasons this had yet to happen, fiduciary (aka employer) liability and annuity portability, were somewhat resolved by the SECURE Act.

The Act now provides a Safe Harbor provision for fiduciaries selecting an annuity company to offer lifetime income annuities.  While the employer will be required to obtain written representations from the annuity company, and evaluate the cost of any lifetime income options, the bar was set pretty low in order for the employer to obtain a substantial amount of liability protection.

Also, the SECURE Act has created a new “distributable event” that only applies to annuities, when they are no longer allowed as an investment option within the plan.  This eliminates some of the unpleasant options under the old rules, including having to liquidate the annuity, thereby losing the lifetime income option.

If you are offered an annuity and/or lifetime income option inside your qualified plan, we highly recommend that you either evaluate the option yourself or seek professional counsel before using this option.  At our firm, we offer a low-cost consultation on your employer-sponsored plan which includes a review of all available investment options and the companies from whom they are offered.

While these are not the only changes brought about by the passing of the SECURE Act, they are the ones that will affect the largest number of people.  They are also the changes that may require an urgent need to update your retirement income plan, your retirement savings strategy, your asset transfer plan, or as a small-business owner, your increased benefits for offering a retirement plan to your employees.

SECURE Act Workshops

At Connections Financial Advisors, we will spend time counseling our clients on how these changes will affect the plans they already have in place.  We also want to educate others on these changes, so they will have time to evaluate their own circumstances and planning options.  We are offering educational workshops on the SECURE Act that we highly encourage everyone to attend.  This will be a great format to have your questions answered, as well as hear from others.  For the most current list of upcoming workshops, please check out the Events page on our website, and follow us on Facebook, LinkedIn and Twitter.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  This information is not intended to be a substitute for specific individualized tax or legal advice.  We suggest that you discuss your specific situation with a qualified tax or legal advisor.

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