The SECURE Act of 2019

This newsletter will focus on the bill that was signed into federal law on December 20, 2019. This is the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. Below in Blue, you will read complex details taken from Michael Kitces Nerds Eye View Blog on the subject. Below that, I will emphasize the impacts for my clients in plain language. A table with the various changes is enclosed with this letter that you can refer to as we chat it through.

WARNING: If you’re bored to tears with the blue article, at least read my comments that offer a summary. This stuff is important.

In the context of financial advisors and the clients they serve, the first, and probably most notable change resulting from the SECURE Act, is the elimination of the so-called “stretch” provision for most (but not all) non-spouse beneficiaries of inherited IRAs and other retirement accounts. Under current law, non-spouse designated beneficiaries can take distributions over their life expectancy, but for many retirement account owners who pass away in 2020 and beyond, beneficiaries will have ‘only’ 10 years to empty the account. On the one hand, without any other distribution requirements within those 10 years, designated beneficiaries will have some flexibility around the timing of those distributions; however, certain types of “see-through” trusts that have been drafted to serve as beneficiaries of retirement accounts may find that they’re no longer able to make annual distributions to the trust under the new rules (only to suddenly have both the IRA and trust forcibly liquidated at the end of the 10-year window).

My Comment: Many of you have large IRAs and may have named your children as beneficiaries. Before this legislation, when the children inherit the IRA, they could take distributions over their lifetime (stretching the IRA). This new legislation requires them to empty the IRA within ten years. (Basically, the government wants more taxes from these accounts)

Other notable retirement planning changes under the SECURE Act include lifting the restriction on making contributions to a traditional IRA after age 70 ½ (as long as there is earned income to contribute in the first place), and an age increase for the onset of RMDs from age 70 ½ to age 72. However, as was the case with the IRS’s recent proposal to update the RMD life-expectancy tables, since only about 20% of retirees take no more than only the amount that they’re actually required to take, any changes in the rules around RMDs will have little effect on the remaining 80% who are already withdrawing more out of their accounts than the IRS requires. In addition, the SECURE Act does not change the age at which an individual can make a Qualified Charitable Distribution from their IRA, which remains at age 70 ½ and now creates a unique 1- or 2-year window where IRA distributions may qualify as charitable contributions, but not as RMDs (that haven’t yet begun).

My Comment: For many of my clients who wait until age 70½ to start taking RMDs, they now can wait until age 72. However, you are still eligible to do Qualified Charitable Distributions (QCDs) at age 70½. If you give money to charities, this is a great opportunity to make tax-free distributions from your IRA to the Charity and a much better way to give to a Charity than from your other income sources.

Beyond the changing or elimination of various age-based thresholds for retirement accounts, the SECURE Act also includes an allowance for a penalty-free distribution up to $5,000 for a qualified birth or adoption, the creation of a Fiduciary Safe Harbor for selecting a “Lifetime Income Provider” (i.e., annuity company) for ERISA fiduciaries (thus assuaging at least some liability concerns around using lifetime income annuities in qualified plans), a substantial increase in the tax credit available to small businesses when establishing a retirement plan (as well as a brand new tax credit for small businesses that adopt an “auto-enroll” provision in their retirement plans), an increase in the allowable auto-enrollment “default” 401(k) plan contribution, improved access to employer plans for long-term part-time workers, and a significant reduction in the barriers to creating and maintaining Multiple Employer Retirement plans (which in theory will help to create economies of scale for lower plan costs when a group of small employers band together to provide a retirement plan)… as well as several other miscellaneous, smaller retirement provision changes.

My Comment: This is a huge win for the insurance lobby as they have been working for a long time to get annuities inside 401k plans. This is also an attempt to deal with the elimination of so many companies Pension Benefits. Penalty-free distribution for adoption is cool. The law is attempting to make it easier and less costly for employers to establish retirement plans for their employees. Also allowing multiple employers to combine their plans. (this should help lower costs for smaller employers and ultimately for the employees who end up bearing much of the cost).

Other notable non-retirement provisions attached to the SECURE Act include a repeal of the TCJA-introduced Kiddie Tax changes (reverting away from a requirement to use trust tax brackets and back to using the parents’ top marginal tax bracket), adjustments to the medical expense deduction threshold (back to 7.5%- of-AGI again for 2019 and 2020!), expanded provisions for 529 college savings plans to be used for Apprenticeships and (up-to-$10,000 of) student loan repayments, and a series of Tax Extenders for the mortgage insurance premium deduction and the higher education tuition and fees deduction.

My Comment: I don’t have much to say about Kiddie tax or medical thresholds other than they are more in the favor of the taxpayer from what they were. The 529 plan changes are really cool. I love that you could use a 529 plan for an apprenticeship and for student loan repayment (just wish it was higher than $10,000).

Ultimately, the key point is that, although not nearly as sweeping as the Tax Cuts and Jobs Act of 2017, the SECURE Act of 2019 makes numerous updates to the rules around retirement plans in an effort to increase access to employer-sponsored retirement plans, and (hopefully) takes a positive step towards addressing the so-called retirement crisis. But as with other legislation in recent years, what legislation may give with one hand, it takes with the other.

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