Understanding the Secure Act: 4 Things You Need to Know

Understanding the Secure Act: 4 Things You Need to Know

May 07, 2020
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The SECURE Act (or “Setting Every Community Up for Retirement Enhancement Act”) was passed at the end of 2019, with most provisions going into effect on January 1, 2020. It’s not often that such sweeping legislation is passed, and while it’s not a massive upheaval, the new rules are expected to cause changes to some retirement strategies. For others, new opportunities may be revealed.


1. New Limits on Stretch IRAs

The SECURE Act “modifies” the distribution rules regarding defined contribution plans and Individual Retirement Account (IRA) balances upon the death of the account owner. Under the new rules, distributions to non-spouse beneficiaries are generally required to be distributed by the end of the 10th calendar year following the year of the account owner’s death.1

It’s important to highlight that the new rule does not require the non-spouse beneficiary to take withdrawals during the 10-year period. However, all the money must be withdrawn by the end of the 10th calendar year following the inheritance.

Other minimum distribution requirements may apply to the surviving spouse of the IRA owner, the disabled or chronically ill, individuals who are less than 10 years younger than the IRA owner, and any child of the IRA owner who has not reached the age of majority.

Let’s say you have a hypothetical $1 million IRA. Under the new law, your non-spouse beneficiary may want to consider taking at least $100,000 a year for 10 years regardless of their age. For example, say you are leaving your IRA to a 50-year-old child. Prior to the rule change, a 50-year-old child could “stretch” the money over their expected lifetime, which may have been as many as 30 more years. Now, however, they must withdraw all the money from the IRA by the time they reach age 61.

2. Changes to IRA Contributions and Distributions

Another major change is the removal of the age limit for traditional IRA contributions. Before the SECURE Act, you were required to stop making contributions at age 70½. Now, you can continue to make contributions as long as you meet the earned-income requirement.2

Also, as part of the Act, you are mandated to begin taking required
minimum distributions (RMDs) from a traditional IRA at age 72, an increase from the prior 70½. Allowing money to remain in a tax-deferred account for an additional 18 months (before needing to take an RMD) may alter some previous projections of your retirement

The SECURE Act’s rule change for RMDs only affects Americans turning 70½ in 2020 or later. For these taxpayers, RMDs will become mandatory at age 72. If you meet this criterion, your first RMD won’t be necessary until April 1 of the year following your 72nd birthday.2

3. Multiple Employer Retirement Plans for Small Business

In terms of wide-ranging potential, the SECURE Act may offer its biggest change in the realm of multi-employer retirement plans. Previously, multiple employer plans were only open to employers within the same field or ones that shared some other “common characteristics.” Now, small businesses have the opportunity to buy into larger plans alongside other small businesses, without the prior limitations. This opens up a much wider field of options.1

Another big change for small-business employer plans comes for part-time employees. Before the SECURE Act, these retirement plans were not offered to employees who worked fewer than 1,000 hours in a year. Now, the door is open for employees who have either worked 1,000 hours in the space of one full year, or at least 500 hours per year for three consecutive years.2

4. Conduit Trusts Have Been Modified

Before the SECURE Act, a conduit trust was an easier way to safeguard the life of an inherited IRA. Instead of making an individual the beneficiary of the IRA, the trust would become the beneficiary. If you were concerned about how your heirs might spend the inheritance, putting your IRA into a conduit trust was one approach to help manage distributions.3

Under the SECURE Act, if the beneficiary of a conduit trust does not qualify as an eligible designated beneficiary (EDB), then the entire plan balance is required to be distributed by the 10th anniversary of the plan holder’s death. The end result is that the previous benefits of the conduit trust might be limited to the new 10-year rule.4

Keep in mind that a trust involves a complex set of tax rules and regulations. Before moving forward with a conduit trust or any other trust, you’d be wise to work with a professional who is familiar with these rules and regulations.

While the SECURE Act represents some significant changes to the laws governing retirement preparation, it’s important to remember that shifts can happen anytime. However, approached with guidance from a financial professional, changes of all types can become easier to navigate. If you have questions or concerns, don’t hesitate to reach out.

1. WaysAndMeans.House.gov, 2019
2. MarketWatch, 2019
3. Forbes, 2019
4. JDSupra, 2019

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss.