On December 20, 2019, President Trump signed into law The SECURE Act. The bill is designed to ease the looming retirement savings crisis by creating additional incentives to save for retirement. As with most legislation, the SECURE act comes chock full of niche provisions that will affect relatively few people. That being said, it does have a few more broad-sweeping ones that will almost certainly impact everyone reading this. Here are four of the most impactful provisions of the bill–two for individuals and two for businesses.
Top Two Provisions Impacting Individuals
Removes the so-called “stretch” IRA
- The stretch IRA was an estate-planning strategy that permitted non-spousal beneficiaries of IRAs to spread disbursements from the Inherited IRA over their lifetime. These same heirs will now be forced to liquidate Inherited IRAs by the end of the 10th year after death, incurring higher tax rates in the process. There are some notable exceptions to this rule, including beneficiaries who are chronically ill or disabled.
- Planning implication: If you have a trust as the beneficiary of your IRA, it is important to have a lawyer review your trust to see if it is impacted by the new law. Some individuals may want to increase Roth conversions during lifetime if their Inherited IRA beneficiary’s tax rates are projected to increase significantly under the new law.
Raises the required minimum distribution (RMD) age from 70½ to 72.
- If you turn 70 ½ in 2020 or later, you can now wait until age 72 to begin mandatory withdrawals from your retirement plans. While this will be a meaningless change for the majority of IRA owners who are using their accounts to live on prior to age 70½, it may present a planning opportunity for others.
- Planning implication: For those who can afford to wait on taking withdrawals, they now have an additional 18 months of tax-deferred growth and potentially 1-2 more years during which they may want to execute Roth conversions at a lower tax rate.
Top Two Provisions Impacting Businesses
Provides a larger tax credit for small businesses that establish a 401(k), 403(b), SEP-IRA or SIMPLE IRA plan.
- Instead of a $500 tax credit, qualifying small businesses (defined as having 100 or fewer employees) can receive up to a $5,000 tax credit for each of three years in a row (for a total of $15,000) upon the establishment of a retirement plan beginning in 2020 or later.
- Planning implication: This is a boon to small employers (not to mention their employees who will now benefit from having more than just a traditional IRA to defer income for retirement)! Tell you employer to take a look at this new tax credit if you don’t currently have access to a retirement plan.
Provides a $500 tax credit for adoption of auto-enrollment of participants in 401(k) plans by small employers.
- Auto-enrollment into a 401(k) plan means that participants will automatically have money taken out of their paycheck and contributed into a 401(k) account unless they specifically request to “opt out.” Again, we are only talking about businesses with 100 or fewer employees. This tax credit is also good for three years in a row upon adoption of an auto-enrollment feature.
- Planning implication: Congress likes this incentive because it has proven to increase the participation rate in retirement plans. This is something to pay attention to especially if you are starting a new job. If for some reason you do not want to participate in your employer’s retirement plan that has auto-enrollment, you will need to “opt out” of contributing.
There are lots of other provisions to the bill, but most of them are of limited value. For example, you can now take penalty-free withdrawals of up to $10,000 from a 529 plan for the repayment of certain student loans. But if you had money in a 529 plan to begin with, it’s a pretty small chance you would have taken out student loans before using up all of your 529 funds.
The SECURE Act’s biggest incentives to improve our country’s retirement savings lie with small business employers. Hopefully, it makes these employers more attractive (to employees) and ultimately more competitive. The positive tax incentives created by the bill will be primarily offset by the removal of the so-called “stretch IRA” estate planning strategy, which will generate an estimated $15.7B in tax revenue over the next 10 years.
*SECURE stands for Setting Every Community Up for Retirement Enhancement