Setting Every Community Up for Retirement Enhancement Act (SECURE Act)

Sabino Biondi

12/31/2019

Dear Friends,

Congress has passed the SECURE Act (Setting Every Community Up for Retirement Enhancement Act). This is the first major piece of retirement law change in a decade, and it can significantly impact your retirement plans. The new law went into effect January 1, 2020 and changes some rules about retirement savings.

What You Need to Know

The new law incorporates several changes that will affect your ability to save money for retirement and will influence how you use the funds over time. Most of the changes are taxpayer-friendly and designed to boost retirement savings. We recommend you learn about these changes, so that you can make the necessary adjustments to your retirement plans. These laws take effect January 1, 2020.

Please reach out to Sabino Biondi if you would like to understand how to process and apply these new rules to your specific individual and family retirement plans.

Email sbiondi@wilkauslander.com or call 646-375-7661.

Critical Changes Include Required Minimum Distributions

Under the prior law, Required Minimum Distributions (RMD) began the year in which the account owner turned 70½. The new law changes the age to 72. If you turned 70½ in 2019, you are still required to begin your RMD’s in 2019. If you turn 70½ after December 31, 2019 you are not required to begin your RMD’s until the year in which you turn 72. This means you can let your retirement funds grow an extra 1½ years before tapping into them, which can result in a significant boost to overall retirement savings. The new RMD age of 72 also allows time to make Roth Conversions or accelerate IRA distributions into low tax years.

No Age Restriction for Traditional IRA Contributions

The SECURE Act completely eliminates the maximum age - which was 70½ under the old rules - that wage earners can contribute to a Traditional IRA. Anyone working beyond 70½ will be able to continue making contributions.

“Stretch” Changes

One of the most common and valuable estate planning tools is the ability of a non-spouse retirement account beneficiary to “stretch” RMD’s over their life expectancy. For example, under the prior law, if you inherited a retirement account, your RMD’s would have been spread over your remaining life expectancy per IRS tables - which would allow the account to grow tax-deferred or tax-free (for Roth IRA’s) over that time based on your life expectancy. The SECURE Act requires that beneficiaries withdraw all assets of an inherited account within 10 years of the date it is inherited. There are no RMD’s within those 10 years, but the entire balance must be distributed after the 10th year. This change could be a problem for those beneficiaries who are in their 40s and 50s, for example, and at the peak of their earning years. That is because by limiting the time frame (10 years as opposed to life expectancy) in which someone can distribute money from an inherited account means potentially boosting the tax burden those distributions will cause. 

This change in the new law does not affect an inheriting beneficiary who is a surviving spouse, children under the age of majority, disabled beneficiaries, or beneficiaries within 10 years of age of the decedent.

Those of you who have Trusts named as beneficiaries of your IRA’s will need to revisit those Trusts in order to: a) ensure they contain the proper language that allows distributions to be made over the new ten-year time frame and b) reassess whether it still makes sense to have a Trust at all.  

Additional Changes:

  • Graduate students and foster care providers could save more.
  • Assistance for small businesses offering retirement plans.
  • Penalty-free withdrawals for birth or adoption of a child.
  • 401(k)s available for part-time employees. Under the current rules, an employee must work at least 1,000 hours per year to be plan eligible. Effective January 1, 2021, the criteria for eligibility will change. Employees who have worked at least 500 hours per years (for at least three consecutive years) will be 401(k) plan eligible and the part-timer must also be 21 years old by the end of the three-year period.

Please reach out to Sabino Biondi if you would like to understand how to process and apply these new rules to your specific individual and family retirement plans. Email sbiondi@wilkauslander.com or call 646-375-7661.