Changes To Retirement Savings: The SECURE Act

by Jennifer Smith, Product Manager | Dec 23, 2019

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Both the House of Representatives and the Senate have signed the 2020 U.S. budget (spending bill), and final approval is expected soon from President Trump. Presidential approval is required in order to avoid a federal government shutdown.

A key section of the bill would require CPAs, tax attorneys, estate-planning attorneys, and other professionals to re-examine certain aspects of their financial planning strategies. The SECURE Act (or “Securing Every Community Up for Retirement Enhancement” Act) was attached to the 2019-2020 must-pass appropriations bill sent to Congress last Monday with a Friday deadline. Passage of the SECURE Act would usher in the most comprehensive change to retirement savings rules since the 2006 Pension Protection Act. The House and Senate have signed off, and the president has been widely expected to sign the bill. After signature, implementation provisions will be hammered out by Congress and additional information will follow.

Under the SECURE Act:

  • 401(k) plan sponsors (employers) would be able to include annuities in those plans and be protected from a significant fiduciary risk: being sued by retirees.  The Act includes a safe harbor rule to preclude such lawsuits. This protection removes a big dis-incentive for small employers to offer plans. Smaller employers would no longer face this aspect of litigation risk.
  • Required minimum distributions (RMDs) would not be required until age 72 (instead of 70 ½).
  • Employers introducing new retirement plans would be eligible for a $5,000 credit (instead of $500).
  • Small employers who implement auto-enrollment would be eligible for an additional $500 credit on top of the new-plan credit.
  • More part-time workers would be allowed to participate in 401(k) plans.
  • An IRA would no longer be eligible for “stretching” for the lifetime of a non-spouse heir. Without the SECURE Act, the taxpayer can extend an inherited IRA’s tax-deferred growth. Under the SECURE Act, this planning strategy would become ineffective for an heir who is not the spouse of the decedent.
    • Example: a person bequeaths 401(k) annuity benefits to his or her surviving spouse: no change. The surviving spouse gets to treat the inherited IRA as his or her own.
    • Example: a person bequeaths 401(k) annuity benefits to someone other than the surviving spouse: significant change. The recipient has only 10 years of tax-deferred growth on the annuity’s principal. After 10 years, the income on the money held in the annuity will be taxed.
    • Note: if annuity benefits are left to a minor child (and who is not the spouse of the benefactor), the 10-year provision does not start to run until the beneficiary turns 18.

This change in the stretch provisions removes a widely used estate-planning technique, but removing this option provides at least some of the tax revenue required to pay for the reductions in tax.

In the coming months, WebCE will publish courses written by our content experts containing the details of the SECURE Act. Be on the lookout for an updated blog post as more details of the SECURE Act become available. 

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