The SECURE Act by Travis Neal
On December 20, 2019, as incorporated into Congress’s 2020 fiscal year appropriations bill, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) became law. For many individuals and small businesses, the SECURE Act will be a net positive. For those with significant savings in qualified retirement plans such as IRAs and 401(k)s (referred to hereafter as IRAs for simplicity), their beneficiaries may see a significant tax hit. This article highlights the positive and negative changes that affect estate planners and their clients. Let’s begin with the SECURE Act’s positive changes for individuals. The required beginning date (RBD)—the age at which an IRA owner must begin taking required minimum distributions (RMD)— has increased from 70 ½ to 72. This allows investments in the IRA to grow tax deferred for longer. Additionally, if an IRA owner continues to work after their RBD, they may continue to contribute to their IRA. If an IRA owner has a birth or adoption in their family, they may now withdraw $5000 within one year of the birth or adoption. On the employer or plan level, several changes should expand the pool of employees with access to IRAs. The SECURE Act creates “open multiple employer plans,” or “open MEPs.” MEPs existed before the Act, but only for businesses with a relationship such as a common owner. The SECURE Act removes
that restriction. The ability of small businesses to band together should reduce cost and complexity for employers, which should then translate into increased access to retirement plans for full- and part-time employees. The SECURE Act allows qualified automatic contribution arrangement (QACA) safe harbor plans to increase the cap on automatically raising payroll contributions from 10 percent to 15 percent of an employee’s paycheck, with the ability to opt out. The SECURE Act requires that plan participants receive an illustration of how much monthly income their retirement savings will provide. Now for the SECURE Act’s negative changes. The most significant one affects beneficiaries who inherit an IRA after Jan. 1, 2020. If that beneficiary doesn’t qualify as an eligible designated beneficiary, they must withdraw all IRA funds within 10 years after the IRA owner dies. Previously, an IRA’s designated beneficiary could stretch out the RMDs over the beneficiary’s life expectancy. This change can best be understood by outlining the three categories of beneficiaries that now exist (the first two of which existed prior to the SECURE Act’s passage).
Non-designated Beneficiary (NB) Prior to January 1, 2020, when an IRA did not have a beneficiary listed, the beneficiary predeceased the IRA owner, or the listed beneficiary did
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