The Setting Every Community Up for Retirement Enhancement (“SECURE”) Act was signed into law on December 20, 2019. With all of the discussion in the news around the political uncertainty, impeachment, and the looming trade war, one of the largest changes to retirement savings laws in recent years was passed with very little fanfare. However, some of the changes will be significant. I have tried to highlight what may impact the majority of our clients and readers.
The Act has a lot of positives such as simplifying rules and making 401k plans potentially available to more workers, pushing back the RMD age, and allowing contributions to IRAs past age 70. The negative impact I see is the elimination of the stretch IRA which is a clear move by the government to raise tax revenues by forcing money out of inherited IRAs sooner. I will discuss in more detail below, but this should be a time to review beneficiaries and discuss whether any change in your legacy planning should be made in response to the new laws.
What do you need to pay attention to?
In my opinion, the three changes that may impact our clients the most are:
- Increasing the RMD age to 72.
- Elimination of the “Stretch” IRA.
- Repeal of the age limit for IRA contributions.
Positive – The Act delays the required minimum distribution age from 70 ½ to age 72, which will allow for additional tax-deferred growth. This change applies to distributions required to be made after December 31, 2019 for individuals who attain age 70 ½ after such date. Said another way, if you were previously required to take an RMD, you will continue to be required to take an RMD. However, if you were born between July 1, 1949, and June 30, 1950, and would turn 70.5 during 2020, you no longer are required to take your Required Minimum Distribution in 2020. Under the new law, these required distributions have been pushed back until the year of your 72nd birthday. This change was made to allow more tax-deferred growth in response to Americans both living and working longer.
Negative – Previously, if you were a non-spouse (i.e. sibling, child, etc.) and inherited an IRA, you had the ability to “stretch” the required distributions over your lifetime. This meant that required distributions for younger inheritors were typically small (in terms of the overall IRA balance.) Under the new law, balances inherited from account owners who passed away on or after January 1, 2020, are required to be distributed over the 10 years from the decedent’s death. There is currently complete flexibility as to when to take distributions (i.e. all in year 1 or all in year 10 or any variation in between.) Eliminating the stretch IRA has been expected for some time, since this accelerates the distribution and taxation of retirement balances, which will increase revenues for the government and help offset reductions of tax revenue from recent tax cuts. Timing of these distributions should be planned for with your advisor as tax consequences could be significant. Following “expected” life expectancies, parents who leave their IRAs to their working children in their 40’s and 50’s (or typically peak earning years) may see significant amounts of distributions subject to income taxes. There may be planning techniques to consider, such as parents taking more distributions in their lower income retirement years, Roth conversions, Qualified Charitable Distributions, etc. Note that the new law does not impact IRA balances left to spouses or for account owners who passed in 2019.
Positive – The Act repeals the disallowance on contributions (and deductions) to a traditional IRA for individuals who have attained age 70 ½ by the end of a year, effective for contributions made for taxable years beginning after December 31, 2019. Individuals will still be required to have earned income and follow other contribution rules previously in place. In other words, there is no longer an age limit on traditional IRA contributions if you meet the contribution requirements.
What shouldn’t have a lot of impact to you?
The law created Pooled Employer Plans (PEPs.) These plans will allow unrelated small businesses to group together to participate in a 401k (previously the businesses needed to be under common control or prove they have certain “commonality” of interests.) The expectation is that investment companies will create these pooled plans and allow unrelated small businesses who previously did not offer a 401k to participate. By grouping together, small businesses will be able to share the administrative costs of providing a 401k plan. Keep in mind, this portion of the act impacts ERISA compliant plans and does not impact IRAs or SEPs.
To encourage businesses to offer retirement plans, there will be tax credits available for businesses who open new plans and provide pre-specified plan features. Also, many of the other provisions reduce the burden of ERISA compliance by providing for streamlined reporting and additional safe harbor options.
There are also provisions which require employers to provide an estimate of lifetime income if an annuity were purchased and permits participants in defined contribution plans to make direct trustee-to-trustee transfers (or transfer annuity contracts) to an eligible employer plan or IRA of “lifetime income investments” that are no longer authorized to be held as investment options.
If you are a 401k plan participant and have questions about communications you receive regarding your 401k plan, please don’t hesitate to reach out. Many of the changes for individuals are scheduled to be phased in over time and may be modified before implementation.
What you need to do?
There is no action required on your part. If you fall into the window of those affected by the changes in RMD rules, we will adjust accordingly. As always, if you have questions about anything you receive or read, please reach out to us here at Atlanta Financial.