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The long-awaited bipartisan SECURE Act (the Act) was finally approved by the House on December 17, 2019, after a seemingly interminable process that began in March 2019. The Senate approved the measure at the speed of light (at least by legislative standards) on December 19. President Trump signed the measure into law the next day, December 20, 2019. The Act is generally effective January 1, 2020.

We love catchy acronyms in our legislation and the Act is no exception. The SECURE Act is the Setting Every Community Up for Retirement Enhancement” Act.

There is much to applaud in the Act but before we address specific provisions, let’s understand how the Act may resonate with a fast-growing (“hottest”) trend in retirement demographics.

According to the AARP, the “hottest demographic [trend] in the labor market [is] men and women working not only past traditional retirement age, but into their 70s, 80s and sometimes beyond. Over the coming decade, they'll be the fastest-growing segment of the workforce…”

Clients who choose or need to work longer will find powerful opportunities to build larger - potentially much larger - retirement portfolios. Not everything in the Act is favorable, however. For example, the “Stretch IRA” is lost for non-spousal beneficiaries; we’ll discuss that in a moment but first let’s summarize the major good news in the Act:

Provisions for Individuals Choosing (or Needing) to Work Longer

  • Contribute Longer - Age Limit Eliminated for Traditional IRA Contributions
    • Contributions to Traditional IRAs may now be made at any age (assuming earned income), rather than ending at an individual’s age 70½.
  • Deferred Distributions - Required Beginning Date Pushed Back 
    • For individuals reaching age 70½ in 2020, the required beginning date for distributions from employer-sponsored retirement plans and Traditional IRAs was pushed back until April 1 following the attainment of age 72.
    • Previously, the required beginning date was April 1 of the year following the attainment of age 70½.
    • For the average retiree, waiting about another 18 months to begin taking distributions under the Act can increase annual retirement income by 3% or more.
      CAVEAT: Individuals reaching age 70½ in 2019 remain subject to the old rules and must generally begin taking required minimum distributions no later than April 1, 2020.

Provisions for Small Business Multiple Employer Retirement Plans

  • No More Bad Apple Penalty
    • As background, multiple-employer plans (MEPs) were created a number of years ago to incent small businesses to sponsor retirement plans.
    • MEPs allow participating employers to reduce the cost of plan compliance and operation by sharing these costs among multiple employers.
    • MEPs never took the small business market by storm due in large part to a fatal flaw; if just one of the employers in a MEP was a bad apple (failed to comply with federal regulations), the retirement plan was disqualified for ALL of the MEP sponsors.
    • The SECURE Act eliminated the “One Bad Apple” rule. Generally, now only the employer failing to comply with federal regulations will have its sponsorship disqualified – the remaining employers and their participants in the MEP will not be affected.
  • More Employers Are Eligible For MEPs
    • Before the SECURE Act, employers in a MEP must have had a shared common characteristic, such as being in the same industry.
    • The SECURE Act eliminated this requirement and thereby removed another obstacle in forming MEPs for small businesses.

Say Goodbye to the Stretch IRA for Non-Spousal Beneficiaries

  • Before the Act, a 25-year-old granddaughter inheriting her Grandfather’s $500,000 IRA (or qualified plan account) could have taken required minimum distributions over 58.2 years (her life expectancy). This was referred to as a “Stretch IRA.” The annual required distribution would have been about $31,500, assuming a 6% return.
  • Under the ACT, the granddaughter will be required to take required minimum distributions over a period not to exceed 10 years. An annual distribution of $67,900 will be required if the 10-year maximum period is chosen.
  • The consequences to the granddaughter are profound. The Stretch IRA would have kept her in a lower tax bracket and would have paid out almost three times as much (unadjusted dollars) to her than in a 10-year distribution period.

Stay tuned! In our next blog we’ll dig deeper and discuss how the SECURE Act:

  • Reduces Kiddie Tax rates,
  • Helps students pay for student loans,
  • Helps qualified plan administrators offer more annuities to participants,
  • Waives premature distribution penalty at the birth of a child, and
  • Offers expanded credits for small businesses who sponsor retirement plans.

Clients can save more, potentially much more, for retirement by contributing to tax-deferred retirement accounts for their entire lifetime (not just until age 70½) and delaying the first required minimum distribution by 18 months.

Generally, an advisor should not recommend a specific distribution strategy unless the advisor is an experienced tax/retirement planning professional acting with the approval of the firm’s compliance department.

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Disclaimer

The information presented herein is provided purely for educational purposes and to raise awareness of these issues; it is not meant to provide and should not be used to provide financial advice to clients. There are variations, alternatives, and exceptions to this material that could not be covered within the scope of this blog.
Consult with your compliance department and a competent tax/retirement planning professional before discussing these matters with clients. This blog represents a preliminary understanding of the Act. Additional guidance and clarification from the IRS are expected to address practitioner questions.