Big Changes in 2020: The SECURE Act
by: Katie E. Finnell, JD, LLM
President Trump signed the SECURE Act into law in late December 2019 as part of the government’s spending bill. SECURE stands for “Setting Every Community Up for Retirement Enhancement”. The act, effective January 1, 2020, is intended to strengthen retirement security for those workers who do not have access to workplace retirement accounts.
Like most pieces of legislation, the SECURE Act has both pros and cons. It impacts individuals, businesses, and families. The SECURE Act:
Offers small business tax incentives to set up automatic enrollment in retirement plans. It offers a tax credit for employers that automatically enroll employees into a retirement plan.
Makes it easier for small businesses to set up 401(k)s by increasing the cap from 10% to 15% of wages in “safe harbor” retirement plans.
Increases the required minimum distribution (RMD) age to 72 from 70.5. Those who turned 70.5 years old in 2019 will still need to withdraw their required minimum distributions this year or receive a 50% penalty of their RMD. Those turning 70.5 in 2020 will not be required to withdraw RMDs until they are 72. The first withdrawal does not need to be made until the following April 1 which means people who turned 70.5 in 2019 can wait to withdraw their RMD until April 1, 2020. RMDs will have to be taken the following December 31 and every December 31 thereafter.
Eliminates the maximum age cap for contributions to traditional IRAs. As Americans are living longer, many are working beyond traditional retirement age and this allows them to continue contributing.
Allows more employers to offer annuities as investment options within 401(k) plans. Previously, employers held the fiduciary responsibility to ensure the products were appropriate for the employees’, but under the SECURE Act, the liability falls on the insurance companies who sell the annuities to offer proper investment choices. The annuities would provide a guaranteed income over the course of a retiree’s lifetime, however, the wrong choice in product could result in additional fees and penalties.
Requires non-spousal account beneficiaries to withdraw all assets of an inherited account within 10 years. This rule does not apply to spousal beneficiaries, disabled beneficiaries, and those who are not more than 10 years younger than the account holder. Minor children are exempt until they reach the age of majority and then they will have 10 years to withdraw the assets. There are no required minimum distributions, but the entire balance must be distributed after the 10th year. Under the previous law, beneficiaries who did not inherit their accounts from a spouse were, in some cases, allowed to withdraw RMDs over their life span. The new law limiting the time from in which beneficiaries can distribute money means potentially increasing the tax burden those distributions will cause. This took effect January 1, 2020 which means anyone who died by December 31, 2019 and their beneficiaries will not be affected.
Allows $5,000 penalty-free withdrawals from retirement plans for any “qualified birth or adoption distribution”. If you are married, each spouse can take a $5,000 penalty-free distribution. (Further IRS guidance will be required regarding repayment of such withdrawals back into the plan/account).
Expands 529 education savings accounts to cover costs associated with apprenticeship programs, homeschooling, private elementary, private secondary, or religious schools. Additionally, up to $10,000 may be used for qualified student loan repayments, plus another $10,000 for repayment of student loans for each of the beneficiary’s siblings.
For additional information and to determine how the new changes may affect your situation, please consult your Estate Planning Attorney, your CPA, and your Financial Advisor.
A copy of the bill can be found at: https:www.congress.gov/bill/116th-congress/house-bill/1994.gov