On December 20th, the SECURE Act passed, having been attached to the $1.4 trillion spending bill. The bill passed the House back in May with a whopping 417-3 vote, but was being held up in the Senate because of certain inclusion items that some senators thought necessary for their constituents. The SECURE Act, along with a significant number of other riders, went into the spending bill. For example, a couple of included riders are raising the tobacco age to 25 and blocking drug companies from withholding samples from generic companies in an effort to thwart replication. This act prioritized by Richard Neal, the chairman of the House Ways and Means Committee and his supporters in the insurance industry, includes a section that provides safe harbor to 401(k) plan sponsors to select annuities to be offered in their plans. What does this mean for those planning for retirement beyond being able to possibly invest in an annuity through a 401(k) at some point?
The SECURE act will bring with it some of the most substantial changes to retirement planning since the 2006 Pension Protection Act. Last year we received some of the most significant changes to the tax code seen in decades, and this year brings with it some of the largest changes in retirement planning in the last decade. Below is a summary of some of the major changes that come with the new law. While this list is not exhaustive, it includes many of the most impactful points, and we will be scouring the new law for planning opportunities for all clients.
So what has changed?
New IRA Rules
- One of the most impactful changes comes from the elimination of the lifetime ”stretch” provision for non-spousal beneficiaries of inherited IRAs and other retirement accounts. The new regulation will follow a new 10-year rule.
- Required minimum distributions (RMD) will now start at age 72 instead of 70 ½ while qualified charitable distributions (QCDs) will still be tied to 70 ½.
- A new distribution is now available for $5000 to be used for qualified birth or adoptions and not be subject to the 10% early withdrawal penalty.
- Taxable non-tuition and stipend payments will now be considered compensation for IRA contributions
- Traditional IRA contributions will not be prohibited after 70 ½ on earned income
New 401(k) Provisions
- A new provision of ERISA very safe harbor for selecting annuity insurance provider for retirement plans
- Creation of a distributable event for annuities no longer allowed as a plan investment option
- Tax credits for small businesses that establish 401(k) or 403(b), SEP IRA, or simple IRA plans
- Additional tax credits for the adoption of auto enrollments for participants in 401(k) plans as well as increases in the maximum contribution for 401(k) automatic enrollments to 15%.
- Long-term part-time employees may now be able to take part in 401(k) plans offered by employers
- Changes to rules for multiple employer plans (MEPS) providing an exception to the “One bad apple rule” so that if one employer fails to satisfy the qualification requirements or providing the information needed to determine compliance would not jeopardize all of the other participants
Miscellaneous Provisions
- Adoption deadlines for employer-funded plans are extended to the date of the employer’s tax return rather than the current year-end year-end
- Allowance for qualified disaster distributions up to $100,000 per disaster from retirement accounts
- “Kiddie” tax reverts to the applicable child’s parents bracket rather than Trust’s tax bracket
- Qualified education expenses for 529 plans expanded for student loans in apprenticeships
Additionally, there are other tax extenders attached to the spending bill as part of the Taxpayer Certainty and Disaster Relief Act of 2019:
- Allows for mortgage insurance premium deduction
- Adjusted gross income (AGI) hurdle rate for deducting qualified medical expenses remains 7 ½%
- deduction for qualified tuition and related expenses
- Many incentives for economic growth, green initiatives, and energy production
The most significant of these changes is probably the change in stretch IRAs, which highlights the complexities in planning with significant rules always subject to change. Financial planning must balance the likelihood of evolving change with the potential savings of a given strategy. For example, one strategy that we previously implemented was to roll over thrift savings program (TSP) accounts to IRAs to maintain stretch provisions for non-spousal IRAs. The new law makes this planning strategy obsolete. TSP plans are not impacted until after 2022. The playing field has been leveled, and there are no stretch provisions for the vast majority of inherited retirement accounts. The new rule requires that the IRA be liquidated within ten years. This rule will require tax planning to minimize the taxation of these accounts. So, there will be flexibility upon which years one can take funds from the IRA as long as the account has been liquidated by the 10th year.
As with most things, there are a few exceptions. Some beneficiaries titled “Eligible designated beneficiaries” will not be subject to the 10-year rule. Included in this category are spousal beneficiaries, disabled beneficiaries, chronically ill beneficiaries, individuals who are not more than 10 years younger than the original account owner, and minor children only until they reach the age of majority. While the stretch IRA is dead for many in the previous examples, it will be alive and well and will come into planning for families with special needs.
Trusts created to serve as a beneficiary for an IRA will need to be reviewed. Many issues will arise; it will need to be analyzed to ensure that the original plan is still viable. In many cases, it will not. The use of trusts in IRAs is a much more complex topic. Feel free to reach out to discuss your particular situation.
In what way do the new rules of the SECURE Act impact you, and are there new opportunities you may use to maximize your runway to retirement?
Please reach out to schedule a Discovery Call to discuss how we may serve you in creating a more solid retirement.
Farther-FamilyVest is your local Fiduciary Financial Advisor in Destin and fiduciary financial advisor on 30A!