Tarheel Advisors

Preparing for Retirement

Secure Act


In a clear case of creating the acronym before the name, Congress recently passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. In this rare show of bi-partisan support, the bill sailed through both houses and was signed into law on December 20, 2019. The new law aims to strengthen retirement security for many Americans by revising many of the rules regarding both individual and corporate sponsored retirement accounts.

The corporate side of things won't be fully understood until the Department of Labor uses the new guidelines to produce rules and regulations, but there are a number of provisions that should help reduce the cost of 401(k) plans - including tax credits for startup expenses, adding an auto-enrollment feature, and allowing businesses from different industries to band together and pool the cost of creating plans for their employers. It also should make 401(k)s more widely available to participants that might not meet the current hours of service requirements by reducing the minimum qualifying hours worked from 1,000 in a year to 500 over three consecutive years.

On the individual side, there were a number of major changes to note. Headlining the amendments is a jump in the required minimum distribution (RMD) age to 72. Those who have not reached the age of 70.5 by December 31, 2019 can now delay the onset of distributions and extra taxable income a little bit longer. Additionally, you can now contribute to IRAs past the age of 70.5 (which was the previous cap), as long as you have earned income. Another major change deals with inherited IRAs. For most beneficiaries, the new rules will require the recipient to distribute the entire account balance within 10 years of the inheritance. In the past, these distributions could be stretched out over the recipient's life expectancy to prolong the life of the accounts and tax deferral. Of note with the change, yearly withdrawals are not required. Instead, the recipient can choose to wait up until the 10th year to empty the entire account. This new rule applies to non-spousal inherited IRAs for deaths that occur in 2020 or beyond. All current inherited IRAs will continue under the old rules. Spousal IRAs, as well those inherited by minors, disabled individuals, and people less than 10 years younger than the decedent will have differing exceptions.

Two other minor additions are 1) 529 plans can now be used to repay up to $10,000 in student loans; and 2) penalty free withdrawals from retirement accounts can now be made for birth or adoption expenses. This exception is limited to $5,000 and must be taken within the first year of birth or adoption. Taxes still need to be paid on any pre-tax deferrals, but the 10% early withdrawal penalty would not apply.