SECURE ACT PASSED

Bryan Strike

MS, MTx, CFA, CFP®, CPA, PFS, CIPM

December 26, 2019

The SECURE Act was a certainty early in the year but seemed to die off over the last few months.  However, the budget bill did include this act, which was signed into law on December 20, 2019.  Below is a writeup that we sent out earlier this year as a refresher on the major changes impacting our clients.  We will have more to add shortly.

Provisions

There are several provisions that are not in the list below for the sake of brevity.  The ones listed and discussed below are what we believe to be of most importance to clients.

107.   Repeal maximum age to contribute to Traditional IRAs

113.   Penalty-free withdrawals for birth or adoption

114.   Increase in age for required minimum distributions

302.   Expansion of 529 plans

401.   Modifications to required minimum distributions for inherited plans

The Good

We view the increased access to retirement plans as a positive implication of this act.  Many of the rule changes enhance employees’ access to contribute, contribute more, and participate sooner in employer sponsored plans.  It also encourages smaller employers to adopt plans where none existed before. (Establishing and administering retirement plans can be very costly and time consuming.)

  • Increase in Age for Required Minimum Distributions (RMDs):
    • The current age a taxpayer must begin taking RMDs is the later of April 1 of the year after the year they turn 70.5 or April 1 of the year after they retire, unless they own more than 5% of their employer.
    • This simply boils down to starting your RMDs the year you turn 70.5 for most people.
    • The new rule would extend the age from 70.5 to 72 for all of those who have not reached age 70.5 by December 31, 2019.
      • For example: if you turned 70 before July 1, 2019, you will be subject to the old rules requiring RMDs to begin this year.  If you turned 70 on July 1, 2019 or later, you will get to wait until the year you turn 72.
  • Repeal of Maximum Age to Contribute to a Traditional IRA:
    • The current rules state that you may not contribute to a Traditional IRA after reaching the age of 70.5, even if you have adequate earnings.
    • The new rule would eliminate this age cap allowing all taxpayers who still have earned income after age 70.5 to contribute to a Traditional IRA.
      • Earned income includes income from sources such as wages, salaries, commissions, tips, bonuses, or net income from self-employment.[i]
  • Penalty-Free Withdrawals for Birth or Adoption:
    • Penalty-free (but not tax-free) distributions will be permitted from retirement plans for the birth of a child or adoption up to $5,000.  The distribution is allowed in the 1-year period AFTER the birth of the child or adoption is finalized.  There is also a payback feature allowing the distribution to be recontributed in one or more payments to the account, not to exceed the amount taken out for the birth/adoption.
  • Expansion of 529 Plans:
    • Repayment of qualified student loans (principal and interest) is allowed from a Section 529 Savings plan.  The amount permitted is limited to a multi-year aggregate of $10,000.  Any interest paid from the 529 plan is not permitted a deduction on the taxpayer’s form 1040 income tax return (no double-dipping).  Interest is deemed to be paid from the 529 first.
    • There were provisions allowing for 529 plan funds to be utilized for elementary and secondary public, private, and religious school.  However, it appears this language has been stripped out in the most recent version available.

The Bad

As with everything, Congress has included several provisions that are “less than stellar.” In our view, the main problems are the revenue raisers, which includes destroying stretch IRAs. The other big problem is bowing to the insurance companies.  Sponsors will now be able, under the safe harbor provision, to select annuity providers that allow them to offer increased annuity options inside of 401(k) plans. This removes current concerns (such as insurance company failure) that stop many plans from including annuities.

  • Eliminating stretch IRAs:
    • Under the old law, when an individual inherits an IRA or qualified retirement plan from a decedent, the beneficiary is generally permitted to take distributions out over the rest of their life.  Since distributions from these plans are generally taxable as ordinary income, this allows the beneficiary to spread out, and therefore reduce, their income tax burden.
    • The new provision would require most beneficiaries to fully liquidate the IRA or qualified plan within a 10-year period after the decedent’s passing.
      • The exceptions to the 10-year rule include the beneficiary being a surviving spouse, children under the age of majority, disabled, chronically ill, and individuals not more than 10 years younger than the decedent.
  • Annuities inside qualified plans:
    • Under current rules it is much more difficult for employers to allow employees to invest their 401(k) or other qualified retirement plan money in an annuity within the plan. The retirement plan decisions must meet a fiduciary standard. Many companies view target date funds as the safest way to meet their fiduciary obligation. These funds are even known as Qualified Default Investment Alternatives (QDIAs) by the U.S. Department of Labor.[ii] 
    • The new rules will allow employers to permit annuity options without fear of fiduciary legal constraints. In other words, the employer can abdicate its fiduciary responsibility by simply selecting various annuity options for employees to choose from. While annuities can serve certain individuals well, they are typically very expensive and perform poorly as a vehicle to amass retirement savings.

Conclusion

While many of the provisions look to have positive ramifications, there are some concerns presented within the current legislation. We will continue to monitor the progress of this bill as it works through Congress. If you have any questions, please feel free to reach out to your advisor.

 


[i] irs.gov/taxtopics/tc451

[ii] dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/fact-sheets/target-date-retirement-funds.pdf

 

 Bryan Strike, MS, MTx, CFP®, CFA, CPA, PFS, CIPM is a Senior Financial Advisor at Kays Financial Advisory Corporation. He can be reached at (770) 951-9001 or at bstrike@scottkays.com.

 This report and Mr. Strikes’ comments are provided as a general market overview and should not be considered investment or tax advice or predictive of any future market performance.

Any security mentioned in this report may not be suitable for all investors. No investment mentioned in this newsletter constitutes a recommendation to buy, sell or hold a particular investment. Such recommendations can only be made on an individual basis after an assessment of an individual investor’s risk tolerance and personal circumstances. Past performance of any investment mentioned is not a guarantee of future performance. Statements regarding the investment concerns and merits of any investment and fair market value computations are strictly the opinion of Kays Financial Advisory Corporation. Employees of KFAC and KFAC clients may have positions and effect transactions in the securities of the issuers mentioned here in.