Understanding the SECURE Act

The Setting Every Community Up for Retirement Enhancement Act of 2019 was signed into law on Dec 20 by President Donald Trump.

The bill includes significant provisions aimed at increasing access to tax-advantaged accounts and preventing older Americans from outliving their assets.

Here is a quick overview of the changes you should be aware of.

RMDs starting at age 72

Prior to the SECURE Act, required minimum distributions (RMD's) from 401(k) Plans and Traditional IRA accounts started when you turned age 70½ (if you work past 70½, RMD's from your current employers plan are not required until you stop working).

The SECURE Act pushed that start date to age 72. Congress had argued that the previous RMD age was outdated since it was put in place in the 1960s.

This change will allow retirement savers to delay forced distributions from their 401(k) and Traditional IRA accounts by 1.5 years.

No age restriction on IRA contributions

People are living and working longer. Under the old rule, you could not contribute to a Traditional IRA account past age 70½.

The new bill removes the age restriction and allows you to contribute to your IRA into your 70s and beyond, as long as you have earned income.

This is a great benefit for older workers who want to continue to save money in a tax-deferred account. There are no age-based restrictions on Roth IRAs, so no change there.

Multiple employer retirement plans

The costs and complexity of 401(k) plans have turned many small business owners away from adopting them. There are a couple of attractive tax credits offered to business owners for setting up a new plan and/or creating an auto enroll feature to their plan.

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Also, starting in 2021, the new law allows completely unrelated employers to participate in a multiple-employer plan to create a "pooled plan."

This allows multiple small business owners to leverage economies of scale and lower administration costs.

This change should hopefully persuade more businesses owners to adopt/offer a 401(k) to their employees, which in turn should increase retirement savings.

End of Stretch IRA

Required Minimum Distributions have changed for non spousal beneficiaries.

Under the current law, non spousal beneficiaries could "stretch" their annual distributions over their live span.

Starting in 2020, the new act requires all of the assets from an inherited IRA be distributed within 10 years of the owner's death (this includes inherited funds from 401ks).

The new act does not require annual distributions, just that the account is completely distributed within 10 years. There are some exceptions to the rule.

Distributions over the life or life expectancy of a non-spouse beneficiary are allowed if the beneficiary is a minor, disabled, chronically ill or not more than 10 years younger than the deceased IRA owner.

For minors, the exception only applies until the child reaches the age of majority. At that point, the 10-year rule kicks in.

The elimination of the Stretch IRA is probably the biggest setback of the SECURE Act for two reasons. First, it takes away many years of potential tax deferred growth for beneficiaries within the inherited IRA.

Second, it causes beneficiaries to be more strategic with their distribution due to the potential increased tax impact.

This change will be sure to change the way estate planning will be handled moving forward.

The SECURE Act has added some much-needed changes/updated to help retirement savers.

However, the change to the RMD rules have made estate planning and retirement income planning more complicated.

This means everyone with a retirement account should review their beneficiary designations, estate plan, and retirement income strategies in light of the new rules.

• John P. Daly, CFP, is fiduciary & wealth manager at Daly Investment Management, LLC in Mount Prospect. For information visit www.dailyinvestment.com.