SECURE Act

As 2019 ended, the Setting Every Community Up for Retirement Enhancement Act of 2019, more commonly referred to as the SECURE Act, was signed into law. The bill is intended to increase access to retirement accounts and prevent older Americans from outliving their retirement assets. It’s still too early to know what effect these changes will have, but on a personal basis, any individual change can be important. Here are some of the biggest changes to be aware of:

RMD and Contribution Age Increased

Under the SECURE Act, the age in which you must start taking Required Minimum Distributions, or RMDs, has been pushed back from age 70 ½ to age 72. With life expectancy continually rising, this update allows retirees to delay the onset of their distributions to maximize their investments. However, those who turned 70 ½ in 2019 will still need to withdraw their RMDs in 2020 or be subject to a 50% penalty. Additionally, there is no longer an age cap for traditional IRA contributions, giving employees who stay in the workforce extra time to save for their future.

Changes to Employer Offered Retirement Plans

The SECURE Act changes employer-offered plans in three main ways. It pushes for more annuities to be offered as an investment option for 401(k) plans; incentivizes small businesses to increase employee enrollment in retirement plans; and increases access to retirement plans for long-term part-time workers.

1. Annuities: Under the previous laws, employers acted under fiduciary responsibility to ensure the products in their employees’ portfolios were appropriate, and employees could sue their employer should the annuity provider fail to pay. The SECURE Act encourages employers to offer more annuity options by shifting the fiduciary responsibility to the insurance providers who sell the annuities and shield the employer from liability should they fail to pay.
2. Small business changes: The SECURE Act widens access to multiple employer plans by eliminating the so-called “bad-apple rule,” wherein one employer failing to meet the plan requirements would cause all other employers involved to fail. Employers also no longer have to be in the same industry, making it easier for them to pool together to enjoy the benefits of the economy of scale. Small employers also receive a tax credit if they automatically enroll workers into their retirement plans, which has been shown to help employees stay enrolled and save more for their future.
3. Access for part time workers: The new rules require employers to invite part time workers to enroll in retirement plans after 1,000 hours of work in a single year, or three consecutive years of 500 hours worked. Previously employees were required to work at least 1,000 hours every year to participate.

Ending of “Stretch IRA”

Before the SECURE Act, non-spousal beneficiaries could in some cases stretch their RMDs out across the span of their lives. Under the new rules, non-spousal inheritors no longer have RMDs, but must withdraw all assets from the inherited account within 10 years. This can cause tax complications for the beneficiary depending on their circumstances at the time they inherit the account. This only applies to heirs of account holders who pass away in 2020 or later. It’s also important to note if an account is using a trust as a beneficiary, the new rules can cause serious complications, so you may need to revisit the language of your trust agreement.