How Does the SECURE Act Impact Me? Key Provisions Explained

The $1.4 trillion spending package enacted on December 20, 2019, included the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which had overwhelmingly passed the House of Representatives in the spring of 2019, but then subsequently stalled in the Senate.

The SECURE Act may have the largest impact on retirement planning since the Pension Protection Act of 2006. Some of the key changes include:

Below you’ll find an overview of each change, the potential implications of those changes, and recommended actions to take to make sure your financial plan stays in line with your goals. With any of these changes, it is critical to talk to your financial advisor. The Department of Labor and IRS are expected to offer further guidance on these new provisions. As policies evolve, we are committed to providing you with ongoing guidance on how these changes could impact your specific circumstances and overall financial plan.  All provisions in the SECURE Act take effect on or after January 1, 2020, unless otherwise noted.


Elimination of “Stretch” IRAs

The SECURE Act requires certain beneficiaries to withdraw the entire inherited IRA amount within 10 years of the original account owner’s death. This provision is NOT retroactive; it only applies to IRAs inherited from account owners who died on or after January 1, 2020.

This rule does not apply to beneficiaries who are:

  • Surviving spouses
  • Minors (until they reach the age of majority, or the age by which they are legally recognized as an adult)
  • Disabled
  • Chronically ill
  • Within 10 years of age of the deceased IRA owner

What does this mean?

Beneficiaries that do not meet the exceptions listed above will no longer be able to make withdrawals over the course of their lifetime. This could have tax implications for the beneficiary, as they will be required to pay taxes on all withdrawals within that 10-year time frame.

What should I do?

It’s a good idea to re-examine your beneficiary designations and discuss these during your next meeting with your financial advisor to make sure they still meet your estate planning objectives.


Removal of Age Limits for IRA Contributions

The SECURE Act removes the age limit for Traditional IRA contributions.

What does this mean?

Starting in 2020, individuals who are 70 ½ or older with earned income are now permitted to contribute to their traditional IRA.  Whether or not their contribution is deductible depends on the amount of their adjusted gross income and if they or their spouse is covered by an employer plan.

What should I do?  

The idea behind this change is that Americans are living longer, and thus working longer. Set up a meeting with your tax professional, financial advisor, and estate planning attorney to see if your overall financial planning strategy needs to be adjusted based on this new allowance.


RMD Age Increase

The SECURE Act increases the age by which you must start taking withdrawals from certain retirement accounts. Previously age 70½, the age that RMDs are now required to begin is 72. Prior provisions regarding exceptions to RMDs from qualified plans remain the same.

What does this mean?

If you’re already taking your RMD, you do NOT get to pause it until you turn 72. The new rule applies only to those who turn age 70½ after December 31, 2019.

If you turned 70½ on or before December 31, 2019, you will be required to take the first withdrawal from your RMD by April 1, 2020.

If you turn 70 ½ in 2020 or later, you are NOT required to take your RMD until the year you turn 72.

What does this mean for Qualified Charitable Distributions?

It’s important to note that the SECURE Act did NOT change the age requirement for Qualified Charitable Distributions (QCDs).

A QCD is a transfer of funds from an IRA (excluding ongoing SEP or SIMPLE IRAs) directly to a qualified charity. To qualify for a QCD, the IRA must be owned by an individual who is over the age of 70½.

This QCD IRA age specification matches the pre-SECURE Act RMD withdrawal age. Thus, charitably inclined investors who were forced to take RMDs because they had turned 70½ could use QCDs to help lower their overall taxable income while also fulfilling their personal philanthropic goals.

So if you turn 70½ in 2020, you can make a QCD without taking an RMD from your IRA.

What should I do?

Consult your financial advisor and tax planning professionals to determine whether charitable giving could be a good fit for your unique circumstances.


Additional Uses for 529 Plans

The SECURE Act expands the use of 529 education savings plans to include the following:

  • Apprenticeship programs
    To use 529 plans to pay for apprenticeship programs, the program must be registered with the Department of Labor. Payments must go towards qualifying expenses, which include books, fees, supplies, and required equipment. To determine if a program is eligible, use the Department of Labor search tool:
  • Student loan payments
    The law specifies an aggregate lifetime limit of $10,000 total in student loan repayments. However, if the beneficiary has siblings, an additional $10,000 per sibling is permitted for repayment of their student loans.

These changes only apply to 529 plan distributions made on or after January 1, 2019. (Yes, you read that date correctly. The new 529 provisions are retroactive to the beginning of 2019.)

What does this mean?

There are a few points to consider here:

  1. Payments to 529 plans are tax free. Thus, payments from 529 plans used to repay student loans will NOT be eligible for the student loan interest deduction.
  2. 529 plan governance is split between federal and state governments. As the New York Times points out, “The new rules are in effect for federal tax purposes, but it’s possible some state 529 programs will not follow along and recognize student loan payments or apprenticeship costs as eligible expenses. (That happened with the earlier change that allowed 529 funds to be used to pay for pre-college education costs.)”
  3. Grandparents potentially have greater opportunity to help grandchildren with higher education costs. Distributions from grandparent-owned 529 plans are considered income to the student, which decreases the amount of financial aid they’re eligible to receive. Because distributions from parent-owned 529 plans are NOT considered income to the student, grandparents will often transfer account ownership to parents sometime prior to the child reaching college age. Thanks to the SECURE Act, grandparents may not have to transfer ownership. Instead, distributions from grandparent-owned 529 accounts can be delayed until after graduation, which means the student can maximize their financial aid while reducing debt after college.
  4. There could be greater opportunity to take advantage of 529 tax benefits. While there are no time limits on 529 plans, contributions typically stop or slow down once the beneficiary reaches college age. However, because 529 plans can now be utilized after college for student loans, it may make sense from a tax perspective to continue 529 contributions for longer than you originally anticipated.

What should I do?

Talk to your advisor about your 529 plan strategy, as these changes could present new planning opportunities that may be a better fit for your goals. Get grandparents involved in the conversation if they have 529 plans for grandchildren.


Incentives for Small Businesses to Offer Retirement Plans

The SECURE Act has a few provisions that address small businesses and retirement plans for their employees:

  • Start-Up Costs Tax Credit
    Small businesses can receive a tax credit for 50% of retirement plan start-up costs, for a maximum of $5,000
  • New Tax Credit
    Additional tax credit of $500 per year for three years is available for small businesses that have retirement plans with automatic enrollment
  • Pooled Plan Provider
    Beginning 2021, small businesses are permitted to band together and offer retirement plans under a pooled plan provider. Further guidance from the Department of Labor and IRS expected.

What does this mean?

The intention behind these changes is to make it easier for more small businesses to offer retirement plans for their employees.

Automatic enrollment increases participation in retirement plans (thus benefiting businesses) as well as employee savings (thus benefiting individuals by increasing their savings).

With the pooled plan provider, small businesses can more easily share administrative tasks and costs associated with starting and maintaining a retirement plan for their employees.

What should I do?

If you’re a small business owner, set up a time to talk to your tax professional and your financial advisor to see if your planning strategies need to be updated to stay in line with your goals.


New Rules for Part-Time Employee Retirement Plan Participation

The SECURE Act expands retirement plan eligibility to part-time employees who have worked at least 500 hours per year for the last three years.

This rule does not apply to collectively bargained retirement plans.

What does this mean?

The previous rule for part-time employee participation in retirement plans was 1,000 hours and one year of service. While employers must still offer plan participation to this demographic, they now must also allow part-time employees who have worked at least 500 hours a year for the last 3 years to make elective contributions as well.

Employers do not necessarily have to provide the same benefits, like matching or profit sharing, to part-time employees participating in the plan.

What should I do?

If you are newly qualified to participate in your employer’s retirement plan, have a conversation with your financial advisor. Gather details about the plan so your advisor can help you determine whether you should stay the course on your current retirement savings vehicles or opt to participate in this new opportunity.


Expansion Annuities & Lifetime Income Options in Retirement Plans

The SECURE Act includes several provisions that encourage employers to include lifetime income annuities in retirement plans. Notably:

  • Safe harbor provisions
  • Lifetime income disclosures*

What does this mean?

Annuities are contractual financial products sold by financial institutions. They are designed to accept and grow funds (accumulation phase), and then disburse a steady stream of payments at a later date (annuitization phase).

While annuities can offer retirees guaranteed income, they can be complex, expensive products that are difficult for even a sophisticated investor to compare.

Prior to the SECURE Act, employers likely didn’t include annuities in retirement plans because they were worried of legal ramifications that would ensue if the insurance company behind the annuity failed. Safe harbor provisions now essentially protect employers from being sued, as long as the annuity they choose is licensed and audited. 

The SECURE Act also requires annual lifetime income disclosures be provided to retirement plan participants. This means the plan sponsor must provide an annual overview of the estimated monthly payment an employee would receive at retirement. While additional guidance is expected*, some argue that this is essentially an advertisement for the annuity provider, since it would “project how much money a person might receive if [they] moved all [of their] 401k assets into an annuity.”

What should I do?

While employers choose the annuity for the plan, employees control how much of their plan they want to allocate towards that annuity. Consult your financial advisor to determine what strategy is best for your personal overall financial goals. If your financial advisor is not independent, seek guidance from an independent party that can objectively evaluate the annuity.


*NOTE: The requirement to provide lifetime income disclosures would apply to benefit statements furnished more than 12 months after the latest of DOL’s issuance of (1) interim final rules, (2) a model disclosure, or (3) permissible assumptions.


Contact Michelle Tigani

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