As part of a year-end spending bill that was passed by the House and Senate and signed into law by the President on 12/20/19, the Setting Every Community Up for Retirement Enhancement (SECURE) Act made some dramatic changes to retirement planning.  Although we have been following the progress of this bill for months, the 29 provisions in the bill will take some time to assimilate into our planning practice.  Here is a brief look at the highlights of the SECURE Act and what we consider to be its best and worst components.

The Pros:

• The age for Required Minimum Distributions has been extended from 70 ½ to age 72 (for people who aren’t already age 70 ½ or older by 12/31/19). This gives seniors an additional year and a half before having to start withdrawals.
• The maximum age for contributing to an IRA (currently age 70 ½) has been repealed. This helps seniors who are still working the ability to continue to contribute into their 70’s and beyond.
• Unrelated small employers are eligible to join together under the multiple employer provision to establish a 401k plan, distributing the administrative expense and possibly reducing the fees. This has the potential of making higher quality retirement plans available to small businesses and their employees.
• Part-time employees who have worked at least 500 hours/year for three consecutive years will be eligible to participate in their employer’s 401k plan starting in 2021. Previously, part-timers who worked less than 1000 hours per year were typically not allowed to participate.
• The definition of “earned income” has been expanded to include stipends and non-tuition fellowships, allowing graduate and post-doc students to contribute to an IRA or Roth IRA based on this income.
• Small businesses can now take advantage of a tax credit of 50% of the retirement plan’s start-up costs up to $5000 maximum. Additionally, there is also a $500 tax credit for new 401k or SIMPLE plans that include automatic enrollment for the first three years.
• New parents now have ability to withdraw up to $5000 (each) from their 401k or IRA without penalty to cover childbirth or adoption expenses. The hope is that this will encourage younger workers to begin funding their retirement accounts earlier, now that the 10% early-withdrawal penalty is waived for these contingencies.
• While not a retirement plan provision, the SECURE Act also expanded the 529 Education Savings accounts to cover registered apprenticeships, homeschooling and up to $10,000 in student loan repayments as well as private elementary, secondary and religious schools. This liberalization should expand the usage of the 529 plan beyond pure college savings.

The Cons:

• The SECURE Act eliminates the stretch provision of IRAs*. Formerly, non-spouse beneficiaries could withdraw from an Inherited IRA over their life expectancy – greatly stretching the longevity of the IRA and minimizing the taxes.  The new law requires distribution within 10 years, accelerating the taxes and increasing the tax rate.  The estimates are that this will bring in $15 billion in new tax revenue in the first 10 years, which is a boon to the government and a bust for taxpayers.

          What can be done? 

• • • Anyone who has listed a trust as their IRA beneficiary should review this choice considering the new legislation.
    • Married couples who may have chosen their children or grandchildren as beneficiaries should reconsider listing the spouse as the primary beneficiary since the stretch provisions still apply to spouses.
    • If you can add multiple beneficiaries, it may minimize the tax burden overall.
    • Finally, it may also be worth reviewing the option of a Roth IRA conversion over several years to build up a tax-free account for your beneficiaries.

• Annuities are sanctioned/encouraged in 401k’s. The legal liability for employers who offer annuities is now limited by a “safe harbor rule” – effectively taking them off the fiduciary hook and limiting their accountability.  Barbara Roper, Director of the Investor Protection for the Consumer Federation of America was quoted as saying, “our take on the annuities safe harbor is that it doesn’t include nearly enough safeguards.”  If the insurance company who provides the annuity fails, the guarantee of lifetime income can disappear leaving the employees in the lurch. Our concerns also include the high cost of annuities; they are very profitable for the insurance company and insurance agent but costly for the employee and the provisions are difficult to understand.  The insurance industry lobbied heavily for this new law and many employers will now have to weigh the risks and rewards of this option.  Our advice for both employers and employees is to proceed with caution if annuities are added as a retirement plan option.

*Note:  There are some exceptions which allow the stretch IRA to continue for beneficiaries who are minors, disabled, chronically ill or not more than 10 years younger than the deceased IRA owner.