Is your future "SECURE"? Important updates on this new legislation

Added on to the year-end appropriations bill, President Donald Trump signed significant portions of the Setting Every Community Up for Retirement (SECURE) Act into law in December 2019.  Many pundits are calling the Secure Act the most significant piece of legislation pertaining to retirement since at least 2006.  There are a few key provisions that we wanted to highlight for our clients.

The Secure Act was aimed at expanding retirement options to more Americans, as up to one-fourth of the population works for small businesses and do not have access to a 401(k) plan through their employer.  So, a key tenet of the Secure Act was allowing small employers to pool together to offer 401(k)s to their employees.  The Secure Act also adds tax incentives for businesses that add plans for their employees and force auto-enrollment.

In addition, the Secure Act lowered the threshold of hours worked by part-time employees to be eligible for inclusion in an offered plan, requiring that part-time employees that have been employed for at least one year and who worked 1,000 hours be offered enrollment in a retirement plan offered by the employer as well as part-time employees that have been employed for at least three years and who worked 500 hours.

Next, the Secure Act eliminates the age cutoff for contributing to traditional IRAs.  Previously, contributions could not be made after an individual reached 70.5 years of age.  Now, for those elderly still working, they can continue to contribute to their retirement savings.

Further, beginning January 1, 2020, the age at which required minimum distributions (RMDs) begin was raised to 72.  Citing that the previous age at which RMDs began (70.5) was calculated based on life expectancies in the 1960s, this portion of the legislation can have crucial tax implications in the tax years where an individual is 70 and 71 years old.  For those that had not yet turned 70.5 years old in 2019, strategic decisions can be made in 2020 and 2021 while income (and tax liability) can still be strategically controlled.

Another important provision of the Secure Act is the elimination of the ability to “stretch” an inherited IRA.  Prior to the Secure Act, an individual inheriting an IRA from a non-spouse could stretch the RMDs over their entire lifetime.  However, for those that inherit an IRA after January 1, 2020, the entire account must be withdrawn within 10 years.  Therefore, for those inheriting an IRA, strategic planning may be needed to limit the tax consequences before forcing a lump-sum withdrawal at the ten-year mark.

Finally, in a win for insurance companies who lobbied Congress, the Secure Act allows annuities to be included as investment options in 401(k) plans.  Previously, the fiduciary duty was on the company offering the 401(k) plan to ensure that the products offered were appropriate for the employees’ portfolios, but, with the Secure Act, insurance companies can assume that fiduciary relationship and sell annuities targeted for retirement plan investors.

While it may take years to see if some of the more-heralded provisions have their desired effect, the provisions relating to the age for RMDs, the elimination of “stretch” RMDs, and the elimination of the age cutoff to contribute to traditional IRAs have tax consequences immediately.  If you think that any of these provisions may affect you, reach out to Paul or a member of the team to discuss how the Secure Act may alter your tax planning.