Highlights and Impact of The SECURE Act

After much debate and delay, last December Congress finally passed meaningful reform designed to increase retirement savings.  The “Setting Every Community Up for Retirement Enhancement Act” or better known by its acronym The SECURE Act, was designed to make it more advantageous for both employers and employees to invest for retirement.  

From a business owner’s perspective, changes were enacted to encourage the establishment of a retirement plan.  The maximum tax credit that an employer may receive for creating either a 401(k) or SIMPLE IRA with automatic enrollment has been raised to $500.  Employers may now band together to establish and maintain Multiple Employer Retirement plans which can reduce costs by sharing administrative expenses.  

For employees, several important enhancements were added.  Part time employees who work either 1,000 hours per year or 500 hours per year over three consecutive years are now eligible to participate in a 401(k).  While the contribution cap for 401(k) plans with automatic enrollment remains at 10% of an employee’s income during the first year of participation, it has been increased to 15% during the second year.  In an effort to promote an investment vehicle that can generate lifetime retirement income, Congress is encouraging the use of lifetime income annuities in 401(k) plans by removing liability from the employer if certain upfront conditions are met and the annuity subsequently fails to perform. 

To accommodate the many taxpayers who continue to work past age 70 and wish to delay the onset of required IRA distributions, Congress increased the age when required minimum distributions (RMDs) must commence.  Beginning in 2020 for IRA accountholders who have not reached age 70½ by the end of 2019, the starting age for RMDs has been raised to 72.  Additionally, individuals who continue to work may contribute to an IRA as long as they have earned income up to the contribution limits.  

In order to generate more tax revenue to offset the increase in the tax preferential treatment afforded to retirement accounts, Congress eliminated the so-called “Stretch” or inherited IRA.  An inherited IRA results from the death of an IRA owner and is re-registered as an IRA Beneficiary Designation Account (BDA) that names both the decedent and beneficiary.  Unlike a traditional IRA, RMDs from inherited IRAs must begin immediately for the beneficiary but can last for their lifetime, thus the term “Stretch”.  Going forward beginning with IRAs inherited from individuals who die in 2020 or later, a full payout is required within 10 years of the death of the decedent.  The timing of these distributions does not matter, only that the account is exhausted within this 10 year time frame.  There are 3 exceptions to this 10 year rule – spouses, minor children and heirs not more than 10 years younger than the deceased. 

The new law now permits a participant to withdraw up to $5,000 upon the birth or adoption of a child without incurring the 10% penalty that is generally imposed for distributions that occur prior to age 59½.  However, the distribution remains fully taxable.   

An interesting quirk resulting from the new law is the apparent disconnect between the increase in the age for RMDs and the availability of making a qualified charitable contribution.  When this benefit was added a few years ago, qualified charitable contributions were allowed for any IRA account holder who had attained age 70½ and thus subject to RMDs.  Regardless of the amount of the RMD, the maximum annual contribution for these individuals to a qualified charity is $100,000.  Despite this age increase, qualified charitable contributions can continue to be made beginning at age 70½.

One interesting feature of the law that has nothing to do with retirement is the use of 529 college savings accounts to pay down qualified student loans.  The SECURE Act allows for a maximum of $10,000 annually to be distributed from a 529 plan to reduce student loan debt.  

While the government has expanded the ability to save for retirement, they have also placed restrictions on legacy planning by limiting the benefits of inherited IRAs.  As is the case with all new tax legislation, there are opportunities and pitfalls that need to be carefully analyzed before taking any drastic measures.