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The SECURE Act Enacted

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We previously alerted you to this legislation that had passed in the House of Representatives in the Spring, but had been stalled in the Senate since then.  It was one of several bills that were attached to the Budget Bill that was finally enacted December 20, 2019 and effective on January 1, 2020.

The SECURE (Setting Every Community Up for Retirement Enhancement) Act makes major changes to retirement plan rules, expands access to retirement plans and changes required minimum distribution (RMD) rules to enable investors to save more on a tax-deferred basis.  It is intended to address retirement security concerns as investors live longer and traditional pensions become increasingly scarce.

However, in order to pay for these favorable changes, the Act makes significant changes to the RMD rules with respect to “stretch IRA” estate planning.

Some of the more important provisions in the Act are discussed below.


Adjustments to required minimum distribution rules
The Act raises the required age to begin RMDs from age 70½ to age 72, now requiring RMDs to begin by April 1 following the year in which an individual turns age 72.

The Act also removes the age cap for contributing to a traditional IRA.  People who choose to work beyond traditional retirement age will now be able to contribute beyond age 70½.  This allows workers to continue to make contributions beyond that age. Previous law prohibited such contributions.

Improved access to plans
The Act increases tax incentives for small employers to offer retirement plans. A current $500 credit for establishing a plan would expand to $5,000. Employers who create a plan with auto-enrollment can take an additional $500 credit for three years.

The Act also makes it more feasible for small employers to team up to create multi-employer plans, which can reduce administrative headaches and costs.

There’s a sweetener in the bill for part-time employees, too: It would lower the working hours required for eligibility to participate in an employer-sponsored retirement plan from 1,000 over a 12-month period to 500 over three years.

Liquidity for new parents
Within a year after birth or adoption, parents would be able to take up to $5,000 in penalty-free withdrawals from retirement plans. Current rules impose a 10% penalty for withdrawals prior to age 59½, with a few exceptions for hardship.

Access to annuities
The new law makes it easier for employers to offer lifetime annuities within retirement plans.  Such products can help workers plan for a predictable stream of income in retirement, but should be carefully analyzed before purchasing.


Prior law
Prior to the passage of the Act, there were longstanding provisions allowing non-spouse beneficiaries who inherit traditional IRA and retirement assets to spread distributions – and therefore the tax obligations associated with them – over their life expectancy.  This ability to create a “stretch IRA” has been a staple of estate planning for retirement assets for a number of years.

Changes to required distribution rules
Effective for deaths after December 31, 2019, the law now generally requires any beneficiary who inherits a traditional or Roth IRA, and is more than 10 years younger than the account owner, to liquidate the account within 10 years of the account owner’s death unless the beneficiary is a spouse, a disabled or chronically ill individual, or a minor child.  This is also true for IRA trust beneficiaries, which may affect estate plans that intended to use trusts to manage inherited IRA assets.  These rules also apply to Roth IRAs.

For example, under prior law, a 50-year old child who inherited a parent’s IRA was required to withdraw the account over a 34.2-year period.  Under current law, the account is now required to be withdrawn within 10 years of the parent’s death.  This change is even more significant in the case of a grandchild being named as a beneficiary.  It should be noted that the new law only requires that the account be withdrawn within 10 years, not ratably over the 10-year period, which may provide for some planning opportunities.

Where do we go from here?
Estate and income tax plans that include retirement plan assets should be reviewed to assess the effects of the new law on the intended result of such plans.  Included in the items that should be addressed are:

·         A review of current primary and contingent beneficiaries of retirement plans

·         If the primary or contingent beneficiary is a trust, whether the trust is a “conduit trust” (where all RMDs received are required to be distributed annually to beneficiaries) or an “accumulation trust” (where distributions are discretionary)

·         Whether such trust provisions should be revised to make them more flexible and generational

·         Considering additional Roth conversion planning

·         Considering naming charities or charitable remainder trusts beneficiaries of accounts

WMS will continue to review the provisions of the new law as they affect the estate and income tax plans of our clients and make recommendations accordingly.  In the interim, please do not hesitate to contact your WMS advisor with any questions or concerns.