Understanding The SECURE Act

What is SECURE?

The “Setting Every Community Up for Retirement Enhancement Act”, or SECURE for short, is a new piece of legislation with significant implications for retirement plans and their participants. SECURE contains over 25 provisions, most of which became effective as of January 1, 2020. Its stated goals are to offer more opportunities and fewer limitations for savings plan participants, to simplify existing retirement plan rules and administration, and to delay required minimum distributions (RMDs). Yet its biggest impact will be to accelerate the required minimum distribution rules with respect to defined contribution plans or annuities, 403(b) plans, and governmental 457(b), and IRA balances upon the death of the account owner.

While the effectiveness of SECURE remains to be seen, it is clear the legislation’s various provisions have the potential to impact individuals’ financial lives in several ways, including preparing for retirement, tax strategy, and estate planning. The extent to which an individual will be affected is dependent largely on the type of plan in which the she or he participates, her or his current stage in life, and who may stand to inherit her or his assets.

What does SECURE impact?

The implementation of SECURE will affect many types of savings plans, including 529s, 401(k)s, pensions, and IRAs. Its influence will be felt in many of the underlying features of those plans, ranging from the eligibility to participate, the accessibility of funds for certain purposes, and beneficiary options. Suffice to say if you own a 529, own an IRA, are an employer who sponsors a retirement plan or are a participant in one, it is important to understand the impact on your plan through consultation with a trusted advisor.

For individuals, the most significant impacts will relate to the treatment of IRAs. SECURE has made the following changes to IRAs:

• eliminates age limit for Traditional IRA contributions for those who have earned income;
• raises required minimum distribution age to 72 for anyone born on or after July 1, 1949;
• continues to allow qualified charitable distributions (QCDs) at age 70½ and beyond;
• exempts 10% early distribution penalty for distributions up to $5,000 used for birth or adoption of a child (or an individual incapable of self-support);
• relaxes rules for what is considered compensation or earned income for IRA contribution purposes for graduate and postdoctoral students and certain home healthcare workers;
• changes non-spouse beneficiary options, including the acceleration of payouts.

Many of these changes are likely to be beneficial to IRA owners during their lifetimes. Having the ability to contribute to an IRA at any age addresses the fact that Americans are not only living longer but also remain in the workforce longer compared to prior generations. Deferring the required minimum distribution age to 72 will be a benefit to most given the ability for retirement assets to continue compounding on a tax-deferred basis. Charitable distributions offer a tax-advantaged way of achieving philanthropic goals. Relief from penalties and the relaxation of certain contribution limitations should also provide flexibility and offer accommodations to savers for retirement.

The one implication of the Act that may be disadvantageous to individuals, or at least spur a rethinking of longer-term financial strategies, is the limitation on beneficiary withdrawals from Inherited IRAs. This change accelerates payouts to a 10-year period for certain beneficiaries of IRAs and defined contribution plans whose owners die after December 31, 2019.

Previously, “designated beneficiaries” (DBs) were defined as individuals or qualified “see-through” trusts (trusts with only discernable individuals named as beneficiaries). All DBs could enjoy an extended period, typically the single life expectancy of the named individual, as the payout period over which to withdraw an Inherited IRA. This became commonly known as the “stretch” IRA option.

“Stretching” an IRA is now only allowed for a newly defined, preferred class of beneficiaries called “eligible designated beneficiaries” (EDBs). These consist of:

• a surviving spouse;
• minor child(ren) of the IRA owner (while a minor);
• an individual who is disabled (for the duration of the disability);
• an individual who is chronically ill (for the length of their illness); and
• an individual who is not more than 10 years younger than the IRA owner.

To reiterate, under the legislation, distributions to individuals other than the EDBs noted above are generally required to be distributed by the end of the calendar year including the 10th anniversary of participant’s or IRA owner’s death. An important distinction is that distributions may be taken in any pattern within that 10-year window and are not subject to a minimum annual requirement.Rules for required minimum distributions for estates, charities and non-qualified trusts have not changed. They must still withdraw the Inherited IRA either over a five-year period (for IRA owners who were not yet required to take distributions) or over the owner’s remaining life expectancy (for IRA owners who were required to take distributions).