The Secure Act: 13 Things Paradigm Financial Advisors Wants You to Know
The Setting Every Community Up for Retirement Enhancement Act of 2019 (Secure Act) was passed by the House this summer and the Senate finally approved it on December 19, 2019. The president signed the Secure Act into law on December 20, 2019, and it went effective on January 1, 2020.
This legislation is designed to help Americans prepare for a financially secure future by incentivizing small businesses to set up employer‐sponsored retirement plans.
What does that mean for you? Paradigm Financial Advisors breaks it all down. The key provisions of the Secure Act of 2019 include the following:
1. New Age for RMDs
Individuals who are under age 70-½ on December 31, 2019 will not be required to take Required Minimum Distributions (RMDs) from their IRA accounts until they reach age 72. As under prior law, if you continue to work after age 72 and you don’t own more than 5 percent of the company you work for, you don’t have to start taking RMDs from your 401(k) until after you have retired. The rules also remain the same for Roth IRAs, so you don’t have to take any RMDs from your Roth IRA accounts.
Planning alert: The new age of 72 does not apply to individuals who are already 70-½ or older on December 31, 2019.
Delaying RMDs until age 72 will benefit IRA owners in several ways:
- IRA and other retirement accounts will continue to grow for an additional 1.5 years longer.
- Individuals who are under age 70-½ will have a longer window of opportunity to do Roth
- conversions to maximize lower tax brackets.
- IRA owners may be able to stay in the lower tax brackets for one to two more years and they
- will pay little or no taxes on dividends & capital gains.
2. Changes for Non-Spouse Beneficiaries
The Secure Act requires non‐spouse beneficiaries to take out the entire balance of an inherited IRA account within a maximum of 10 years. Prior to the Secure Act, the beneficiaries of your IRA could stretch out the distributions over their life expectancy. Under the new rules, the beneficiaries of your IRA have to take out distributions over a maximum of 10 years.
The new distribution rules for inherited IRAs will force your beneficiaries to take out larger RMDs and they will end up paying taxes sooner than they would have if they were allowed to take out distributions over their life expectancy.
Planning Alert: If you own an IRA account, you may need to amend your Living Trust and change your beneficiary forms to comply with the Secure Act’s new inherited IRA distribution rules.
There are a few exceptions to the 10-year distribution rule for inherited IRAs for beneficiaries that are:
- Less than 10 years younger than the IRA owner
- Children of the IRA owner who have not reached the age of 18
- Permanently disabled
- Chronically ill
3. Age 70-½ Restriction Repealed
The age 70-½ restriction on making IRA contributions is repealed. Under the Secure Act, an individual can contribute to a traditional IRA account at any age as long as they have earned income. This provision was included in the Secure Act to address the fact that Americans are working and living longer and Congress believes they should be allowed to continue to contribute to an IRA at any age. The rules for Roth contributions are unchanged. An individual can contribute to a Roth IRA regardless of their age as long as they have earned income (unless they are phased out because their income is too high).
4. QCDs Age Requirement Unchanged
The Secure Act does not change the age 70-½ requirement for making Qualified Charitable Distributions (QCDs) from an IRA.
Planning alert: The Secure Act has created a window of opportunity for individuals who are under 70-½ on December 31, 2019 because they will be able to make QCDs for one to two years before they start taking RMDs at age 72.
If you are over 70-½, you can make a QCD of up to $100,000 per year from your IRA directly to a qualified charity. The amount of any QCD that you make counts toward your RMD requirement but it is not counted as taxable income. Making a QCD reduces your taxable income and lowers your net effective tax rate. Making a QCD may make sense for individuals who typically do not spend all of the money that they receive from their RMDs each year and have a desire to make charitable contributions. Making a QCD lowers your adjusted gross income, which may help reduce or eliminate taxes on your Social Security benefits and it may also help you avoid or reduce the Medicare surcharge.
5. Penalty-Free Withdrawals from IRA Accounts to Pay Child Birth or Adoption Expenses
The Secure Act waives the 10 percent penalty for early withdrawals (prior to age 59-½) of up to $5,000 from a retirement account if the money is used to pay for expenses related to having a child or for an adoption.
6. Tax Credit Increased for Businesses that Establish a Retirement Plan
The tax credit for businesses that start a 401(k) or other retirement plan is increased to a new maximum of $5,000. If the business also sets up a retirement plan with auto enrollment, they will qualify for an additional tax credit of $500.
7. Retirement Plan Sponsors Must Provide Lifetime Income Illustrations to Participants
The Secure Act requires retirement plan sponsors to provide participants with an individual benefit statement at the end of each year that estimates what the annuity equivalent payout would be based on the participant’s account balance at the end of each year.
8. Changes to 403(b) Plans
The Secure Act allows 403(b) plan participants to rollover their annuity contracts to another employer’s retirement plan or IRA account. Prior to the Secure Act, when a 403(b) plan was terminated, the annuity contracts inside the plan were also terminated so the participant, or their surviving beneficiaries, often had to pay surrender charges and taxes upon the surrender of the annuity contract. The Secure Act requires 403(b) plan sponsors to allow participants to transfer their annuity contract in‐kind to an IRA account upon termination of a 403(b) plan to avoid surrender charges and retain the tax-deferred status of their annuity contract.
9. Using Credit Cards to Withdrawal Loans from Retirement Plans Banned
The Secure Act bans using a credit card to take out loans from retirement plan accounts. The Secure Act prohibits retirement plan sponsors from allowing participants to use credit cards to take out loans from their retirement plan account.
10. Part-Time Workers may be Eligible to Participate in 401(k) Plans
Sponsors of 401(k) plans will have to let part‐time workers voluntarily contribute to the plan if they have completed at least 500 hours of service each year for the last three years. However, employers are not required to match any contributions made by part time workers.
11. Students Can Make IRA Contributions
Students who are in grad school and fellowships may be eligible to make IRA contributions. The Secure Act treats stipends paid to graduate students and post‐doctoral fellowships as earned income for purposes of qualifying to make IRA contributions.
12. Tax Rates Lowered for Children’s Unearned Income and Capital Gains
Under the Secure Act, a dependent child’s unearned income will be taxed at their parent’s tax rate. Previously, under the Tax Cuts and Jobs Act of 2017 (TCJA) dependent children were subject to the highest marginal rates for trusts & estates so if their income exceeded $12,750, they were subject to a 37 percent tax rate. Under the TCJA, many children ended up paying 37 percent on the taxable portion of their college grants, college scholarships and military survivor benefits.
Under the Secure Act, a dependent child’s unearned income will be subject to their parent’s tax brackets and in 2020 the 37 percent tax bracket does not apply unless income exceeds $622,050.
13. Types of Expenses That Can be Paid from 529 Accounts Expanded
The Secure Act expands the types of expenses that can be paid from 529 accounts.
- 529 Plans can be used to cover costs for an apprenticeship program.
- 529 Plans can also be used to cover up to $10,000 of principal or interest on a student loan taken out by the designated beneficiary or a sibling of the designated beneficiary.