Will the SECURE Act Change Your Retirement Planning?

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We prepared this letter about a new law affecting retirement planning, called the SECURE Act, to go out in the first quarter of 2020. Then the coronavirus pandemic, shelter-in-place orders, and market swings meant other news took precedence. 

Still, there are some important changes in the new SECURE Act that may affect your own retirement planning. 

In December 2019, Congress passed landmark legislation called the SECURE Act (“Setting Every Community Up for Retirement Enhancement”) with the goal of increasing accessibility to employer-sponsored and other individual retirement plans.  There are other implications as well, including major changes to select tax laws regarding specific types of accounts. Effective on January 1 of this year, the SECURE Act has the potential to change retirement planning for many of our clients, including those with family trusts. 

Below you’ll find a topical summary of the major elements of the SECURE Act. There’s a lot here, and, as you’ll see, some of these new rules apply to very specific financial situations. We highly recommend discussing the SECURE act provisions that might apply to you with your Telarray Advisor before making any changes to your investments or retirement plans.


Rob Dingler, CPA, PFS

Traditional IRA Maximum Contribution Age Repealed

Before 2020, individuals that had reached the age of 70-1/2 years were not allowed to make contributions to a traditional IRA even if the individual had qualifying earned income during the year.  The SECURE Act allows an individual of any age who has compensation (usually from wages or self-employment) to contribute to a traditional IRA.

Required Minimum Distribution Age Raised

Before 2020, as a general rule, individuals were required to take a distribution, called a Required Minimum Distribution (RMD), from retirement plans and IRAs starting at 70-1/2 years of age.  RMDs were required to occur every year after that.

The SECURE Act raised the starting age for RMDs to 72 years old.  For those who want to defer withdrawals from retirement accounts, this extends the investment period of the retirement plan.  It also simplifies the date on which the RMD takes effect (72 years old versus trying to figure out the date of 70-1/2 years of age).  The SECURE Act only applies to individuals who have not turned 70-1/2 years before December 31, 2019.  Individuals who were required to take RMDs in previous years will continue taking distributions as designated before the SECURE Act.

Qualified Charitable Distributions Still Allowed at 70-1/2 Years

As noted above, the start date of RMD’s is now age 72.  Under the SECURE Act, pushing back RMDs to 72 years of age does not impact the date in which individuals may begin to use their IRAs (or inherited IRAs) to make a Qualified Charitable Distribution (QCD).  An individual turning 70-1/2 years old in 2020 is not required to take an RMD; however, he or she may still make a QCD.

Inherited Retirement Plan Distribution Period Shrinks

Before 2020, beneficiaries of retirement plans or inherited IRAs were generally allowed to spread distributions over the beneficiary’s expected life span.  (This is occasionally called a “stretch IRA.”)  The beneficiary life expectancy rule allowed the beneficiary to take advantage of additional tax deferrals by extending distributions over a longer timeframe.

The SECURE Act changed the length of the distribution period for beneficiaries of retirement plans and inherited IRAs to a maximum of 10 years following the 2020 death (or later) of the original plan participant or the IRA owner.  Hence, the “stretching effect” of the tax-deferred advantage is no longer allowed, with the following exceptions.

There are five groups of designated beneficiaries to which this change does not apply (distributions can stretch over the beneficiary’s expected life span):

  • Spousal beneficiaries
  • Disabled beneficiaries [as defined by tax law, IRC Sec. 72(m)(7)]
  • Chronically ill beneficiaries [as defined by tax law, IRC Sec. 7702B(c)(2)]
  • Individuals who are not more than ten years younger than the decedent
  • Certain minor children of the original account owner, but only until they reach the age of majority.

These changes regarding the distribution period may create challenges for family trusts, where the trust is the beneficiary of the retirement plan.  In general, it is good to review the beneficiary status of any retirement plan periodically; however, with the change in these rules, we highly recommend that anyone with trust provisions and certain tax circumstances review their legal documents to make sure to maintain the most advantageous tax position.

In general, the new distribution period for inherited retirement plans begins in 2020.  However, there are a few exceptions:

  • Plans maintained within a collective bargaining agreement have an effective date of January 1, 2022 (unless the collective bargaining agreement ends sooner).
  • Governmental plans [such as 403(b) and 457 retirement plans sponsored by state and local governments, and the Thrift Savings Plan sponsored by the Federal government] have an effective date of January 1, 2022.
  • Annuities in which individuals have already elected an irrevocable income option that begins at a later point are exempt.  The binding contractual provisions of the annuity are in effect.

Sec. 529 Educational Savings Plan Expanded

A Section 529 Educational Savings Plan is a qualified state tuition program that allows individuals to make contributions on behalf of a designated beneficiary.  Earnings on investments in Sec. 529 plans are tax-free if distributions are for the designated beneficiary’s qualified higher education expenses (as defined by the law).  Before 2019, “higher education expenses” did not include expenses for registered apprenticeships or student loan repayments.

The SECURE Act changed the definition of “higher education expenses” retroactively for distributions paid after December 31, 2018 (meaning all distributions in 2019 and going forward) for fees, books, supplies, and equipment required for the designated beneficiary’s participation in a registered apprenticeship.  In addition, an IRA owner can withdraw up to $10,000 for the payment of principal or interest on qualified education loans of the designated beneficiary, or a sibling of the designated beneficiary.

Kiddie Tax Changes

The “Kiddie Tax” is a tax on the unearned income of certain minors.  Beginning in 2017, the taxable unearned income of a child incurred tax according to the tax rates for trusts and estates.   Minors to whom this applied also had a lowered tax exemption amount for Alternative Minimum Tax (AMT).  Before 2017, the tax rate on this unearned income was the parents’ tax rates or the child’s tax rates, whichever was higher, and there was no AMT adjustment to the child’s tax exemption. 

The SECURE Act repeals the Kiddie Tax laws enacted in 2017.  Now, the unearned income of a minor is taxed under the pre-2017 rules — the higher of the parents’ tax rates or the child’s tax rates.  Furthermore, there is no AMT adjustment to reduce the minor’s tax exemption.

Penalty-Free Retirement Plan Withdrawal for Births or Adoptions

In general, retirement plan distributions are a component in determining income.  If a distribution occurs before the plan participant or IRA owner reaches age 59-1/2 years, there is also a 10% early withdrawal penalty on the distribution, in addition to the income tax, to “encourage” plan participants to leave the investments in the plans for retirement.

The SECURE Act makes an exception to the early withdrawal penalty for the qualified birth or adoption of a child.  Now, penalty-free retirement plan distributions (up to $5,000) are allowed to pay for expenses of the qualified birth or adoption, up to one year after the date of birth or finalization date of the adoption of an individual under the age of 18.  Under this rule, this exception is only allowed after the event occurs, which means a withdrawal to cover expenses cannot occur before the adoption or birth.  There is no indication the distribution must be used for specific expenses related to a birth or adoption. The only requirement is that such an event occurred.

The distribution is still includable in income for tax purposes.  The $5,000 penalty exemption is available on an individual level.  For married couples, each spouse may receive $5,000 penalty-free for a qualified birth or adoption from each person’s respective retirement account.

Compensation for IRA Purposes to Include Taxable Stipends and Fellowships

Before 2020, stipends and non-tuition fellowships of graduate and doctoral students were not included in compensation to calculate the amount of IRA contributions allowed.  The SECURE Act has changed the definition of “compensation” to include taxable non-tuition stipends and fellowships for IRA purposes.

Compensation for IRA Purposes to Include Tax-Exempt “Difficulty-of-Care” Payments

Home healthcare workers may qualify for tax-exempt compensation because their only compensation comes from “difficulty-of-care” payments.  Before 2020, these valued workers were unable to contribute to retirement plans because their income was not taxable compensation.  The SECURE Act changed “compensation” for these specific home healthcare workers to include “difficulty-of-care” payments for IRA contribution limits as of December 31, 2019 (and retroactively starting in 2016 for contributions made to certain qualified plans).

Small Businesses Qualify for a (Bigger) Tax Credit for Establishing a Retirement Plan

Small businesses (those with fewer than 100 employees receiving $5,000 or more of annual compensation) previously qualified for a tax credit up to $500 for up to three years for the startup costs related to setting up a retirement plan.  One of the motivations of the SECURE Act was to encourage the adoption and use of retirement plans among small businesses.  Therefore, the SECURE Act has increased the tax credit allowed for start-up costs for tax years beginning January 1, 2020.  (See your tax advisor for more information on how this could help your small business.)

Small Businesses Qualify for a New Tax Credit for Auto-Enrollment

Auto-enrollment in a retirement plan is a proven way to increase employee participation in employer-sponsored retirement plans.  The SECURE Act has established a separate tax credit for the provision of auto-enrollment plans.  (Again, see your tax advisor for more information.)

There are other provisions of the SECURE Act that apply to 401(k) employer plans (from the company perspective, not the employee perspective).  Please contact your CPA to discuss any of these small business enhancements should they apply.

Telarray Advisors, LLC, provides this information to our clients as an introduction to the changes made by the SECURE Act.  We highly recommend discussing the changes with an appropriate expert before making any changes to your investments or retirement plans.


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