The Setting Every Community Up for Retirement Enhancement (SECURE) Act

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law on December 20, 2019. Many of the provisions create additional opportunities for individuals to save for retirement. However, not all of the changes are favorable. In particular, many IRA owners will want to consider changing their arrangements to optimize both income and estate tax consequences.

Required Minimum Distribution Age Raised to 72

Individuals who reach age 70½ after 2019 can now delay taking their required minimum distributions (RMDs) until they reach age 72. As under prior law, this requirement does not apply if you are still employed when you turn 72. If you turned 70½ in 2019, the old law applies, and you must take your RMD no later than April 1, 2020, and your second RMD by December 31, 2020.

No More Age Restriction on Traditional IRA Contributions

For tax years beginning in 2020 and beyond, you can make contributions to your IRA after reaching age 70½ if you have earnings from wages or self-employment income. However, these contributions can impact the amount of qualified charitable distributions (QCDs) you can make each year. Deductible IRA contributions you make once you reach age 70½ reduce the $100,000 in QCDs that are allowed each year dollar-for-dollar.

Stretch IRA Reduced to Ten Years

Until the SECURE Act, beneficiaries of retirement accounts were generally allowed to stretch out distributions from the inherited accounts over their life expectancy. If the account was inherited prior to 2020, and for the decedent’s spouse, these prior rules still apply. However, for non-spouse beneficiaries inheriting accounts in 2020 and beyond, the full account balance must now be distributed within ten years following the year of death. There are some limited exceptions to this rule for a child who has not reached majority, a chronically ill individual, or a beneficiary who is not more than ten years younger than the decedent. This provision is expected to raise significant tax revenue in the coming years.

With these changes, it may be worth considering or re-considering various Roth strategies. Roth accounts do not have RMD requirements the way qualified plan and IRA accounts do. Contributions to Roths are on an after-tax basis, but distributions taken out for retirement by participants and future heirs are not subject to income tax, and the accounts grow tax-free. With current income tax rates lower than they have historically been and scheduled to increase after 2025, now might be an ideal time to consider paying the tax to achieve Roth status. Since most non-spouse heirs will now be required to pay tax over ten years rather than their lifetime, there is a greater likelihood their tax bracket will be higher than what exists currently. Additionally, if you are subject to Oregon estate tax (exemption is only $1 million), the income tax you pay now reduces your taxable estate.

There are a variety of ways to capitalize on Roth opportunities: deferral contributions to your employer’s Roth 401(k), 403(b) and 457(b) plan, contributions to Roth IRA, back-door Roth contributions if your income is too high for regular contributions, and Roth conversions. Roth accounts can also be considered as part of your estate planning when thinking about what assets you want to pass to heirs and their future related income tax obligations.

Other Provisions

529 Plans Expanded Retroactive to 2019

Tax-free distributions from 529 plans can now be used to pay the principal and interest on a qualified education loan of the designated beneficiary or their siblings, up to $10,000. Distributions can also be used to pay for an apprenticeship program, including books, supplies, and equipment.

Penalty-Free Early Retirement Plan Withdrawals for Expenses Related to Birth or Adoption of a Child

Starting in 2020, retirement plan distributions up to $5,000 that are used to pay for expenses related to the birth or adoption of a child will not be subject to the 10% early withdrawal penalty on the amount included in income.

Employer Retirement Plan Changes

Now long-term, part-time employees who work for at least 500 hours per year for three consecutive years are eligible to participate in their employer’s qualified retirement plan.

There is a new $500 per year general business credit for employers with no more than 100 employees who include automatic enrollment in their plan design. There are also a variety of other qualified plan changes, including credits for small employer pension plan startup costs, changes to safe harbor rules, and plan loans, to name a few.

The SECURE Act includes other provisions as well. If you want to learn more about the changes we have highlighted here, or others that may impact you, contact your Perkins & Co service provider. If these law changes create opportunities for you, you’ll want to act soon to fully capture the benefits.