INTRODUCING THE SECURE ACT
Written By: Mike Pruitt, CFP(R), RICP(R)
Highlighting Some Changes To The Retirement Savings World
For the first time in over a decade, Americans will see some sweeping changes to the provisions that govern their retirement accounts. President Donald Trump signed the bill known as the “Setting Every Community Up for Retirement Enhancement Act,” or SECURE Act, into law on December 20, 2019.
This sweeping bill (along with a series of year-end tax extenders) offers several adjustments to our current laws surrounding saving and preparing for retirement. The SECURE Act is poised to: provide more part-time workers with the opportunity to participate in an employer-sponsored 401(k) plan, adjust the age caps on traditional IRAs and increase access to tax-advantaged retirement savings accounts. There are some two-dozen provisions in the law but here are a few of the most-likely to have a sweeping impact.
Change #1: The RMD Age Change
Previously, when someone reached age 70½, they were required to begin withdrawing money from their retirement accounts (known as a Required Minimum Distribution, or RMD). The SECURE Act has adjusted this minimum distribution age to 72. This allows retirement accounts to mature for an additional year and a half. Additionally, the SECURE Act did NOT change the Qualified Charitable Distribution rule, keeping that provision at 70.5. So even though a retiree will not be required to draw until 72, they may still use their IRA to make a QCD of up to $100,000 for the year.
Change #2: Penalty-Free Withdrawals For Qualified Births & Adoptions
Section 113 of the SECURE Act introduces a new exception for those who seek early distributions. You may now withdraw from your retirement accounts penalty-free for "Qualified Births or Adoptions." New parents, whether through birth or adoption, are allowed to withdraw up to $5,000 from their individual retirement accounts. Income taxes will still apply to the withdrawal, but doing so within 1 year of the birth or adoption will allow the 10% early-withdrawal penalty to be waived.
Also important to note, the exception applies on an individual basis. Therefore, if both of a child’s parents have available retirement assets, each can make a Qualified Birth or Adoption Distribution of up to $5,000 for each child born/adopted.
Change #3: The Stretch-IRA Is Gone…Replaced By A Ten-Year Rule.
Prior to the SECURE Act, investors with an inherited IRA were given the opportunity to withdraw the amount over their life expectancy, a strategy known as “Stretching” the IRA. Under the new act, beneficiaries who have inherited a retirement account will be required to withdraw the amount in its entirety within 10 years of receiving the account. There are certain people that are exempt from this (known as “Eligible Designated Beneficiaries”):
- Spousal Beneficiaries
- Disable Beneficiaries
- Chronically Ill Beneficiaries
- Individuals Within Ten Years Of Age of The Decedent
- Certain Minor Children Of The Original Retirement Account Owner Until Age of Majority
Change #4: Eliminating the Age Limitations on Contributing to IRAs
Beginning in 2020, individuals of any age will be allowed to contribute to a Traditional IRA if they have “compensation”. Prior to the passage of this legislation, individuals had to stop contributing to their traditional IRA once they attained age 70 ½, regardless of their employment status. Now, people may continue to contribute as long as they are working.
This is a big change and could make a huge difference when it comes to retirement savings. More and more Americans over the age of 55 are making up a significant portion of the U.S. workforce. And as people live longer and work into their later years, this gives them a great opportunity to add to their savings or catch-up on years they may have missed.
Change #5: 401(k) Eligibility For Part-Time Workers
Before the SECURE Act, employees were required to work 1,000+ hours for an employer in order to be eligible to participate in a 401(k). The SECURE Act includes additional provisions to help employers encourage employees to increase contributions and to let (some) part-time employees participate when they were previously ineligible to do so.
In order to be eligible, part-time employees will have to have worked 500+ hours per year for an employer for the past three consecutive years. In addition, the employee must be 21 years of age or older by the end of those three years.
These changes for part-time workers apply to plan years beginning in 2021, but the SECURE Act does not require an employer to start ‘counting’ 500-hour years for the purposes of this new rule until 2021. That means that the earliest an employee would be eligible to participate in a 401(k) plan as a result of this change will be in 2024.
Change #6: Easier Access To Annuities Within Employer Retirement Plans
Section 204 of the SECURE Act, provides for a Fiduciary Safe Harbor for ERISA fiduciaries selecting a “Lifetime Income Provider” (i.e.an annuity company).
Previously, while not disallowed, many ERISA fiduciaries have excluded lifetime income annuities out of fear that should the annuity carrier fail to meet their financial obligations, the fiduciary would be held liable. The SECURE Act helps calm this fear with a new Section 404(e) of ERISA that requires the fiduciary to satisfy two requirements when conducting an annuity carrier search. Once those have been met, the employer actually receives a substantial amount of liability protection, outlined within ERISA 404(E)(5).
As mentioned in the beginning, this is just a primer of the some of the changes included in the SECURE Act. Congress clearly wanted to encourage more savings by Americans and included provisions to benefit employers as well as employees. But they also created some unique challenges by opening the door for annuities within retirement plans and eliminating the stretch-IRA provision. If you have further questions regarding the new provisions and whether they may impact you or not, please reach out to us directly via email at firstname.lastname@example.org.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
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