The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, which passed the House in a sweeping 417-3 vote, was incorporated into an end-of-year spending bill and was signed by President Trump on December 20, 2019. This legislation was a bipartisan effort and puts into place numerous provisions that are intended to enhance retirement security. The act itself contains 29 separate provisions, but we will highlight some of the key changes and discuss how this may impact your financial plan.
One of the most notable changes under the Act is that Required Minimum Distribution (RMD) initiation age increases from 70.5 to 72. This applies to anyone who has not reached age 70.5 by 12/31/2019. This is a huge benefit for retirees who don’t necessarily need to withdraw from their retirement accounts and will allow for additional time to invest the assets before having to make a distribution. Along the same lines, contributions to IRAs will now be allowed past age 70.5, so long as that individual has earned income in the year contributions are made.
Among other changes, small businesses will now have more flexibility in setting up multiple employer retirement plans under the Act. Several previously restrictive rules have been lifted to offer greater access to small businesses. Additionally, employers that automatically enroll employees in retirement plans will get a tax credit to offset the costs of starting a 401(k) plan or SIMPLE IRA, on top of the start-up credit they already receive. These changes will enable employers to help their employees saving for retirement in a big way.
Younger investors stand to benefit from a few provisions as well. SECURE makes provision for a withdrawal of up to $10,000 from 529 plans to repay student loans. In addition, new parents, through birth or adoption, will be eligible to withdraw $5,000 penalty-free from qualified retirement accounts to offset the cost of qualified delivery or adoption expenses.
Perhaps the biggest drawback of the SECURE Act is the elimination of Stretch IRAs. Previously, if you were to inherit an IRA or 401(k), you could then distribute the assets based on your own life expectancy. With SECURE, beneficiaries are required to withdraw all assets of an inherited account within 10 years. Limiting the time frame in which someone can distribute money from an inherited account means potentially boosting the tax burden those distributions will cause. A notable exception applies to spouses who inherit assets. It is also worth noting this will not impact inherited IRAs which are already in place.
These are just a few of the provisions included in the Act. While some changes are more significant than others, it is important to understand how this may impact your financial plan. Our team is still processing the various aspects of the legislation, but we encourage you as always to reach out to your advisor if you have any questions or concerns.