What You Need to Know about the SECURE Act

January 15, 2020

The new Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 was passed with the goal of making it easier for Americans to save for retirement with simplified access to retirement plans and more opportunities to save.  From the young professional to the retired, these highlighted provisions are worth noting and could be planning opportunities for you in various stages of your career:

  1. Just Starting Out:

  • The new act reduces the number of hours you must work each year to participate in a 401k plan. Instead of the full-time standard, if you work part-time and have worked at least 500 hours in each of the last 3 consecutive years, you will now be eligible to contribute to your employer’s 401(k) plan. You may also see that more employers are automatically enrolling you in their 401k plans.  This eliminates the confusion of signing up for a plan and encourages you to start saving as soon as you are eligible.  Unfortunately, these changes don’t apply to plans until 2021, therefore the earliest a part-time employee may be eligible to participate isn’t until 2024.
  • If you’re compensated for research at the graduate or postdoctoral level, a new provision now counts this as earned income for the purpose of contributing to an IRA or Roth IRA. For 2020, you may contribute up to $6,000 in total.
  • As a new parent, with a new birth or adoption, you can now take a distribution from your IRA or 401(k) plan of up to $5,000 ($10,000 per couple) within 1 year of the event without incurring the 10% penalty for early withdrawal. While tapping into your retirement account is tempting, remember, any money you take out of your retirement account is not there growing your future benefit.  We always recommend you consider all other options before you make withdrawals from your retirement accounts.
  • Lastly, you may see new lifetime income annuities added to your workplace 401K as an investment option. These options can now be offered because the SECURE Act eliminates the liability risk for the plan fiduciary- they are not liable if your annuity fails to provide the income promised later in life. Annuities with lifetime payment benefits may sound appealing at first, but make sure you understand the risks. Annuities often have very high imbedded fees that can make their ultimate growth much less than you would have had investing your funds outside of an annuity. The language in the new ERISA Section 404(e)(3) also specifically states – “Nothing in this subsection shall be construed to require a fiduciary to select the lowest cost contract.” This means your plan may add these options without considering the costs to you.  If you are interested in a lifetime annuity, be sure you consult with a financial professional who can help you consider your choices.  For most young professionals who have a long-time horizon, an annuity option is usually not the optimal choice.

 

  1. Mid-career-Wealth Building:

  • One of the most important changes from the SECURE Act is the elimination of the “Stretch” provision for inherited retirement accounts for most non-spousal beneficiaries. In the past, if you inherited an IRA from a non-spouse- such as a parent- you could use your remaining life expectancy to withdraw the funds from the IRA, allowing continued tax-deferred growth for many years.  Unfortunately, the new provision condenses your withdrawal period to 10 years. However, with that said, there is no required annual distribution as long as the balance is $0 by the end of the 10th year. The elimination of the stretch is particularly punitive if you’re a high-income earner because the reduced time frame may move you up into a higher tax bracket. If you plan to retire soon or have plans to wind down your career, you might hold off taking any distributions from an inherited account until you have lower income. Note: This rule applies to those who inherit IRAs starting January 1, 2020. If you have an inherited account prior, you are grandfathered with the stretch distribution schedule and can use your life expectancy.
  • Some good news if you have overfunded a 529 plan for your children. A provision added to the SECURE Act expands qualified expenses to include registered apprenticeship programs and qualified student loan repayments. The student loan repayment only allows for a lifetime repayment of $10,000 per plan beneficiary.  Be careful though, if you use this benefit, you can’t deduct the loan interest on your taxes that year.

 

  1. Late Career-Retirement Planning:

  • We think one of the best benefits of the SECURE ACT is that you fund your retirement account longer.  First, if you turn 70 ½ in 2020, and you are still working or your spouse is still working, you are no longer prohibited from contributing to a traditional IRA or a spousal IRA. You can keep saving money in your IRAs or Roth IRAs for additional tax-deferred savings.
  • If you have decided to work part-time, you now still can participate in your employer’s retirement plan if you meet all the criteria mentioned above for those starting out.
  • Next, the required minimum distribution (RMD) age has been moved back 18 months from 70 ½ to 72. You can now delay your 1st mandatory distribution until April 1st following the year you turn 72.
  • Finally, if you have estate planning in mind here are some new things to think about:
    1. You probably want to review your beneficiaries on your IRAs due to the new 10-year distribution requirements of inherited IRAs. You may want to add grandchildren as contingent beneficiaries and if you have named a trust as the beneficiary of your IRAs, it is time to meet with your estate planning attorney and review how best to achieve your goals.
    2. A Roth account is still a valuable tool for estate planning, but the SECURE Act imposed a 10-year distribution rule, requiring your beneficiaries to withdrawal all funds within 10 years of inheriting the account. If you have large traditional IRAs, it is time to consult with a professional as to the estate benefits of converting to Roth IRAs.
    3. If you are charitably inclined, and want to consider a non-spouse beneficiary, you may want to consider a charitable remainder trust (CRT) for all or a portion of your IRA assets. The CRT can provide the “stretch” benefit of income for a beneficiary’s lifetime. At your beneficiary’s death, the remaining assets in the trust goes to your designated charity.

 

Use the passage of the SECURE Act as a planning opportunity for reviewing your savings strategies and making informed decisions about your future plans. Be sure to speak with your financial professional to understand how these new provisions will impact you.