The SECURE Act: Which Investors Are Affected and How?
It has been several decades since the last major piece of retirement legislation made its way to the President’s desk. With the president’s signature on December 20, 2019, the Setting Every Community up for Retirement Enhancement (SECURE) Act makes many small improvements to existing retirement savings options that, collectively, add up to a significant change. Additionally, the act contains a few provisions not tied to retirement planning, but of interest to financial advisers and their customers.
The act originally passed out of the House in May on a 417-3 vote. It was expected to sail through the Senate and make its way to the President’s desk quickly. A few senators wanted a provision or two added to the bill and blocked passage. After some negotiation, the act passed through the Senate as part of a spending bill and was signed into law.
The SECURE Act brings change to a number of investors, including:
- Those saving for retirement
- Those nearing or in retirement
- Employers with or considering retirement plans for their workforce
- Expectant parents
- Those saving or paying for education
- And several other minor provisions
Saving for Retirement
- Current law prohibits contributions to traditional Individual Retirement Accounts (IRAs) after the age of 70 ½. Beginning with the tax year 2020, this rule is removed. As long as a person has earned income, they may continue to contribute to a traditional IRA.
- Employers who provide a 401k plan for their employees are required to include employees that are age 21 and have worked 1,000 hours or more in the prior 12 months. Beginning in 2021, employers must also include part-time workers. A part-time worker is defined as having worked 500 hours or more for three consecutive years and 21 years old by the end of the three-year period.
- New provisions will make it easier for employers to offer annuities within 401k plans. It is likely that more annuities will be made available within 401k plans as pay-out options for retirees.
Nearing or in Retirement
- Beginning for the tax year 2020, IRA owners must begin to take Required Minimum Distributions (RMD) from their IRAs beginning at age 72. The current requirement is to begin to take these distributions beginning at age 70 ½. This rule does not apply to those that have already reached 70 ½ by the end of 2019.
- Those who inherit an IRA have been able to choose an RMD payout based on their life expectancy. With a younger person, this could result in very small RMDs and accounts that payout for very long periods of time. This is popularly known as a “stretch IRA” and was a popular estate planning tool. However, this rule is changing. For IRA owners who die after the end of 2019, their beneficiaries must take their distributions over a period of 10 years, effectively eliminating the stretch IRA option. If a stretch IRA is part of your clients’ estate plans, it is time to find a new strategy.
- Small companies (and their employees) have struggled to afford retirement plans for their employees. New rules under the SECURE Act allow the creation of Multiple (or Pooled) Employer Plans (MEPs). Two or more separate employers may join together to offer a retirement plan to their employees. These MEPs may be formed starting on January 1, 2021.
- The Act increases the company tax credit for starting a retirement plan and allows the credit in each of the first three years of the plan.
- Part-time employees may now be included in plans, and there are new rules for offering annuities in employer-sponsored plans.
- Qualified automatic contribution arrangements may be increased over time to as high as 15 percent (the current cap is 10 percent).
- There are several other new rules for employers. Most of these changes are designed to enhance retirement savings. If you are an employer, then you should talk to your plan adviser about changes that affect your company. If you are an adviser, then you should be ready for those phone calls.
- The SECURE Act allows for a tax-free withdrawal from IRAs and other retirement plans for the birth of a child without the distribution being subject to a 10 percent penalty. The withdrawal may be up to $5,000, and married couples may each take out $5,000. The distribution must be taken within the first year of the child’s birthday. Income taxes are still due on the distribution but without a penalty.
- The Act extends the same penalty-free withdrawal for costs associated with adopting a child.
- The definition of “qualified education expenses” now includes fees, books, supplies, and equipment needed for apprenticeship programs and certifications.
- Up to $10,000 of 529 funds may be used to pay down student loans for the account beneficiary, plus an additional $10,000 for each of the beneficiary's siblings.
There are other provisions to the SECURE Act, but the above are the parts that are most likely to appear on industry qualifying exams. If you are taking an exam after January 1, 2020, be sure to review when these different rules become effective. You can expect test questions for the new rules to appear along with their effective dates. If you are an adviser, then you should get up to speed on the SECURE Act and the changes it brings to your clients and customers.