The SECURE Act: What you need to know

What does SECURE stand for?

We know our politicians love acronyms so here’s a mouthful for you…The SECURE Act stands for ‘The Setting Every Community Up for Retirement Enhancement Act’. Whew!  

If you participate in an IRA and or a 529 Plan, then pay attention.  Some of these changes affect 2020 and some are retro-active to 2019 and 2018 so hold on to your seat!

Also covered below is a big warning to investors about one very important (but overlooked) section of this law.

When was the SECURE Act signed into law?

The SECURE Act was signed into law by President Trump on December 20, 2019.

What are the details of the SECURE Act?

Want to learn more? No problem. Here is a handy link to the actual law.

Have fun reading all 124 pages…or you can just read our summary below!

SECURE Act Summary

Note: There are a LOT of new changes from this law. We are covering the ones we believe will most help our clients who are investors in their retirement plans, heirs to retirement plans and/or small business owners.

IRA Changes

• Tell grandma she can keep her money in longer!

  The law adjusts the Required Minimum Distribution (RMD) age from 70 ½ to 72. This means that you are no longer required to take distributions from your IRA until April, the year following your 72^nd Your investments can continue to grow for 18 additional months. Don’t get confused with when you are eligible to withdraw from your IRA. That age remains 59 ½.

• The RMD age change did not affect your ability to make Qualified Charitable Contributions (QCD’s) beginning at age 70 ½.

• Want to keep working and saving?

  Prior to the SECURE Act, you could not make IRA contributions after the age of 70.5. This has changed! As long as you are actively earning income (the first requirement for contributing to an IRA), the restriction on limiting contributions after age 70 ½ has been lifted. So, if you are still working at age 72+, you could potentially contribute to your IRA at the same time you are required to take a distribution. I think the government is trying to tell us we should work longer!

• Having a baby or adopting?

  You can now take a penalty-free (not tax-free) $5,000 (maximum) distribution for a qualified birth or adoption. And if you’re married and you both have IRAs, you can both take a distribution.

• Planning to inherit an IRA?

  The not-so-good news part of the Act is that non-spouse beneficiaries of IRAs can no longer take distributions over their life, spreading out the tax consequences over many years.

  Now, the IRA balance has to be distributed over 10-years. There is some flexibility in how it’s distributed, as long as it’s completely distributed by the end of the 10^th year after death. So if you know grandpa, mom or great Aunt Ruth is leaving you a massive IRA…you may want to do some tax planning now.

A BIG WARNING TO ALL INVESTORS!

One big change of The SECURE Act is that it eases the rules and legal risk to employers who offer annuities in their retirement plans.

Annuities can be great options because they can offer a guaranteed income stream in retirement. Most businesses have not offered annuities in their retirement plans because an annuity is only as strong as the financial firm that backs it up, and employers were scared of the legal risk to them if the annuity company could not pay out what it had originally guaranteed in the future.

The SECURE Act changes this by taking the legal risk off of employers who offer annuity options in their employer retirement plans. Don’t worry, your employer cannot just start offering random annuity options with no due diligence. The new law requires your employer to only work companies that are in good standing with the state insurance department where they are based.

So why the warning?

Our warning goes out to both employees and employers.

As an employee:

Be aware of new annuity offerings within your retirement plans, and if you are considering one, make sure to research the company and understand your potential risk of loss (worst case scenario the annuity company goes belly-up). Speak with an independent financial planner for a second opinion if are unsure of the company or what percentage of your retirement savings you should annuitant.

As an employer:

Be aware of new annuity offerings to offer in your company retirement plans. While the Secure Act eases your liability, you still need to do your due diligence and only work with reputable companies.

For Business Owners

• If you own a small business (or even just a solo contractor) and have been considering a SEP, SIMPLE IRA or a qualified retirement plan (like a 401K) there’s an increased tax credit of up to $500 per year for the first three years of the plan. Even though we are in 2020 you can still open a SEP or SIMPLE IRA until your business’s 2019 tax due date. (Want to do this but don’t have the cash now? File a tax extension and give yourself longer to fund the account).

Non-Retirement Changes

• Have extra money in your 529 Plan?

  529 funds can now be used to pay for apprenticeship programs and up to $10,000 in student loan repayments. 529 plans became more flexible after the Tax Cuts & Jobs Act (TCJA) and continue to be a great investment for a variety of reasons with these new updates. Three important points regarding student loan repayments that are worth mentioning:

  • It’s a lifetime limit of $10,000, not an annual limit.
  • It can be retroactive to 2019.
  • It can be used for siblings’ (of the designated beneficiary) student loan repayments as well.

Changes to Minor Children with Income 

• The Secure Act repeals the change to the Kiddie Tax, reverting to the rules that were in effect before 2018. If your minor child had unearned income, they were originally taxed (prior to Tax Cuts and Jobs Act, TCJA) at the parents’ top marginal tax bracket. After the TCJA, they were taxed at the trust tax rates (for years 2018 and 2019), but now it reverts back to the parents’ top marginal tax bracket. If this previous change negatively affected you, you can amend your 2018 return.

There is much more to the SECURE Act, but we hope this brief summary was helpful. If you need a second opinion, planning advice or a financial plan contact us. We are a fee-only tax and financial planning firm dedicated to the needs of our clients.