The SECURE Act and What You Need to Know

The SECURE Act was part of a larger law that passed with bipartisan support in late 2019 and became effective January 1, 2020. The SECURE Act contains many provisions which will effect individual taxpayers, some of the most notable include:

  1. The Act changes the age at which a taxpayer must start withdrawing from an IRA or retirement plan. Prior to passage of the Act, age 70.5 was the mandatory withdrawal age, while the SECURE Act increases this age to 72. This change is beneficial as it allows a taxpayer to keep money in the plan longer and further delay tax.
  2. The SECURE Act allows a taxpayer to contribute to a traditional IRA past age 70.5 if he or she has earned income from employment. Again, this change allows additional tax deferral.
  3. However, the SECURE Act accelerates the timing when most beneficiaries of an inherited IRA or retirement plan must take distributions from the IRA or plan. The Act does not actually increase the tax the beneficiaries will pay, but requires the tax to be paid sooner in almost all circumstances.

Generally under the SECURE Act, most people designated as beneficiaries of IRAs and retirement plans of people dying after 2019 must take all distributions from the plan or IRA by the end of the 10th year after the death of the plan participant. Under prior law, the beneficiary would have been required to take distributions over his or her own life expectancy, which could have been many decades, depending on the age of the beneficiary at the participant’s death.

Thus, the SECURE Act basically eliminates the stretch IRA. Current stretch IRAs for those who died before 2020 are still good and will continue to function as before. Under the 10 year rule, there are no RMDs during the 10 years. Instead, the entire IRA balance must be distributed by the end of the 10 years. Beneficiaries can withdraw any amounts they wish over the 10 years, so beneficiaries to have some planning flexibility within the 10 year limit.

The exception to this new rule relates to “eligible beneficiaries” who do not face the new 10 year rule, but for whom the old rules continue to apply. Eligible beneficiaries are:

  • (a)the spouse of the plan participant;
  • (b)a child of the participant under the age of majority. The beneficiary must be a child of the participant, not just any minor child, and second, when the child reaches the age of majority, the 10 year rule applies at that time;
  • (c)a person who is medically disabled or chronically ill; and
  • (d) a person who is less than 10 years younger than the participant.

Finally, inherited Roth IRAs are subject to the same 10 year payout rule, except that distributions will generally be tax free. Roth conversions will likely become more popular in order to eliminate what could be a big tax bill within 10 years after the death of the participant.

Other miscellaneous provisions in the Act provide penalty-free early withdrawals from IRAs and from qualified plans of up to $5,000 due to the birth or adoption of a child. Regular income taxes will still apply.

Taxpayers with high medical bills may be able to deduct unreimbursed expenses that exceed 7.5% (in 2019 and 2020) of their adjusted gross income. In addition, individuals may withdraw money from their qualified retirement plans and IRAs penalty free to cover expenses that exceed this threshold (although regular income taxes will apply). The threshold returns to 10% in 2021.

529 account assets can now be used to pay for student loan repayments ($10,000 lifetime maximum) and costs associated with registered apprenticeships.

The SECURE Act also provides certain benefits to employers:

  • The tax credit that small businesses may take for starting a new retirement plan has increased to the greater of $500 or the lesser of $250 times the number of non-highly compensated eligible employees, or $5,000.The credit applies for up to 3 years. The previous maximum credit amount allowed was 50% of start-up costs up to a maximum of $1,000.
  • A new tax credit of up to $500 is available for employers that launch a SIMPLE IRA or 401k plan with automatic enrollment. The credit applies for 3 years.
  • With regard to the new mandate to permit certain part-timers to participate in retirement plans, employers may exclude such employees for non-discrimination testing purposes.
  • Employers now have easier access to joint multiple employer plans (MEPs) regardless of industry, geographic location, or affiliation.Open MEPs as they have become known offer economies of scale, allowing small employers access to the types of pricing models and other benefits typically reserved for larger organizations. The legislation provides that the failure of one employer in a MEP to meet plan requirements will not cause other to fail, and that plan assets in the failed plan will be transferred to another. This rule is effective for plan years beginning on or after January 1, 2021.
  • Auto-enrollment safe harbor plans may automatically increase participant contributions until they reach 15% of salary. The previous ceiling was 10%.