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 represents the most sweeping set of changes to retirement legislation in more than a decade.
While many of the provisions offer enhanced opportunities for individuals and small business owners, there is one notable drawback for investors with significant assets in traditional IRAs and retirement plans. These individuals will likely want to revisit their estate-planning strategies to prevent their heirs from potentially facing unexpectedly high tax bills.
All provisions take effect on or after January 1, 2020, unless otherwise noted.
Elimination of the “stretch IRA”
The SECURE Act eliminates the stretch IRA for most non-spouse beneficiaries. Previously, beneficiaries could spread distributions and taxes over their lifetime. Under the new law, beneficiaries more than 10 years younger than the account owner must liquidate the account within 10 years of the owner’s death. Exceptions include spouses, disabled or chronically ill individuals, and minor children.
This change may lead to higher-than-expected tax bills for beneficiaries of large traditional IRAs. IRA trust beneficiaries may also need to reconsider estate plans designed around inherited IRA assets.
Possible solutions:
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Reevaluate beneficiary designations.
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Consider converting traditional IRAs to Roth IRAs, which can be inherited income tax-free.
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Spread conversions over multiple years to take advantage of current lower tax rates, which are set to expire in 2026.
Learn more about IRA contribution limits for 2024 to maximize your savings.
Understand the impact of the SECURE Act on Social Security retirement planning.
Explore options for building the best retirement portfolios.
Benefits for Individuals
The SECURE Act also adds several advantages for workers and retirees:
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Individuals can contribute to traditional IRAs beyond age 70½.
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Required minimum distributions (RMDs) start at age 72, rather than 70½.
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Part-time workers (age 21+, 500+ hours over three years) can join company retirement plans.
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Employers must provide annual statements estimating retirement plan assets as monthly lifetime income.
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Lifetime income annuities within retirement plans are easier to offer and transfer without penalties.
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Parents can take penalty-free withdrawals up to $5,000 for the birth or adoption of a child (regular income tax applies).
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Individuals with high medical bills can deduct unreimbursed expenses exceeding 7.5% of AGI and withdraw funds penalty-free from qualified plans.
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529 plan assets can now pay for student loans (up to $10,000 lifetime) and apprenticeship costs.
Benefits for Employers
The SECURE Act also supports employers offering retirement plans:
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Increased tax credits for small businesses starting new plans. Credits can now reach up to $5,000 per year for three years.
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Employers launching a SIMPLE IRA or 401(k) with automatic enrollment may receive a $500 credit for three years.
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Part-time employees may be excluded from nondiscrimination testing.
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Employers can more easily join multiple employer plans (MEPs) regardless of industry or location.
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Failure of one employer in an MEP will not affect others; assets transfer to another plan if needed.
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Auto-enrollment safe harbor plans can raise participant contributions up to 15% of salary, up from 10%.
