New Bipartisan Law Encourages Retirement Saving

True bipartisan support of just about anything in Washington has become as rare as sightings of the Loch Ness monster — and almost a tale from the past. Yet on December 17th, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in the House with a 417–3 vote. Two days later, it also passed in the Senate with bipartisan support. Late in the evening on Friday, December 20th, President Trump signed the SECURE Act into law as part of the year-end appropriations package.

This is the first major retirement plan legislation since the Pension Protection Act of 2006, and it affects millions of Americans. The far-reaching bill includes significant provisions aimed at increasing access to tax-advantaged accounts and preventing older Americans from outliving their assets. Our country needed this legislation. According to GOBankingRates’ sixth annual savings survey, in 2019, 69 percent of respondents said they had less than $1,000 in a savings account.

Yet sadly, reporting of this historic bill and its bipartisan support was lost and underreported as the media chose to focus instead on partisan politics.

So what does it mean for you? The Secure ACT has 29 major provisions. Here are just a few key provisions that could have an immediate impact on you:

  1. Section 113 of the SECURE Act raises the required minimum distribution age (RMD) from 70½ to 72. This means that people can now wait to begin making their RMDs. The age 70½ was first applied in the retirement-plan context in the early 1960s and has never been adjusted to take into account increases in life expectancy.
  2. Section 106 of the new law removes the age limitation on IRA contributions. In the past, once you reached age 70½, you could no longer contribute to a traditional IRA, if working, although you could contribute to a Roth IRA. With the new law, there is no age limitation on contributing to a traditional IRA, as long as you have earned income.
  3. Section 401 of the bill reduces the “stretch IRA” provision for nonspouses. Previously, a nonspouse beneficiary could stretch payments from a retirement plan over his or her life. The SECURE Act requires a nonspouse beneficiary to draw inherited retirement plans like 401(k)s, traditional IRAs and Roth IRAs over a period no longer than 10 years.
  4. Some 401(k) plans will automatically enroll you and start deferring part of your salary unless you actively opt-out. Currently, the maximum percentage of employee compensation that may be deferred under a 401(k) plan that includes a “qualified automatic contribution arrangement” (QACA), unless the participant affirmatively elects otherwise, is 10 percent of eligible compensation. Section 101 of the SECURE Act raises this maximum to 15 percent.
  5. Currently, safe harbor 401(k) plans are required to provide an annual notice to participants apprising them of their rights and obligations under the plan, whether the employer safe harbor contribution is satisfied by a matching contribution or a nonelective (i.e., profit-sharing) contribution. Section 102 of the SECURE Act eliminates the requirement to provide such notices with respect to safe harbor 401(k) plans that satisfy the employer safe harbor contribution with nonelective contributions. The notice requirement remains in place with respect to plans that use matching contributions to meet the safe harbor requirements.
  6. Section 112 of the Act provides the ability to draw up to $5,000 from a retirement plan without penalty for the birth or adoption of a child.
  7. Section 204 creates new rules that expand lifetime income options within retirement plans, such as annuities.
  8. Section 302 allows 529 plan owners to withdraw up to $10,000 tax-free for payments toward qualified education loans. However, there is no double-dipping when it comes to federal education tax benefits. Any student loan interest paid for with tax-free 529 plan earnings is not eligible for the student loan interest deduction. Also, the $10,000 limit is a lifetime limit that applies to the 529 plan beneficiary and each of their siblings.

One important item to note is the potential impact on IRA’s with a trust named as beneficiary or a trusteed IRA. We believe it is always good practice for all beneficiary designations of retirement accounts to be periodically reviewed to see if they are still in line with your wishes.  The changes introduced by the SECURE Act make it important to review any situations where trusts are named as retirement account beneficiaries. This is something you should discuss with your estate planning attorney.

In general, trusts created to serve as the beneficiary of a retirement account are drafted in such a manner as to comply with the “see-through trust” rules which allow the trust to stretch distributions over the oldest applicable trust beneficiary. Both Conduit and Discretionary trusts could be treated unfavorably by the provisions in the SECURE Act. For instance, many Conduit Trusts are drafted in a manner that only allows for the required minimum distribution to be disbursed from an inherited IRA to the trust each year, with a corresponding requirement for that amount to be passed directly out to the trust beneficiaries. In light of the changes made by the SECURE Act, for those beneficiaries subject to the 10-Year Rule, there is only one year where there is an RMD… the 10th year! As a result of this change, Conduit Trusts drafted with this type of language may not allow distributions of the inherited account until the 10th year after death (because prior to that 10th year, any IRA distributions would be ‘voluntary’). And then, in the 10th year, the entire balance would have to come out in one year to the trust… and be passed entirely along to the trust beneficiaries (as a mandated RMD that under the Conduit provisions ‘must’ be passed through). The end result could be what would amount to a very high tax bill, as the entire value of the retirement account is lumped into a single tax year as a distribution to the beneficiary.

 Discretionary Trusts may not fare much better though, if at all. It is not yet clear whether the IRS will allow all See-Through Trusts to actually see through the trust to an Eligible Designated Beneficiary. The SECURE Act specifically provides that such trusts can (subject to certain rules) be treated as an Eligible Designated Beneficiary when the applicable trust beneficiary is a disabled or chronically ill person. The law is silent, however, as to how a trust benefiting other Eligible Designated Beneficiaries (i.e., a spouse, a minor child, or a beneficiary within 10 years of the deceased retirement owner’s age) should be treated. Thus, it remains ambiguous. Future IRS guidance will likely be needed to address this question.

Because each person’s planning needs and situation are unique, it’s important to work with your financial advisor to develop a plan that is best for you. The SECURE Act is intended to encourage Americans to save more for their own retirement. As we live longer and do more later in life, it is critical that we have the financial resources to maintain and even enhance our standard of living.

The passage of this bill serves as a reminder that bipartisan work is possible and is happening. Ultimately, the government and regulations will not make financial security a reality for us. We have to take some personal responsibility, and the end results are largely dependent on our own actions.

Please contact our team with questions or if we can help you figure out how to optimize your retirement savings and planning. It’s your vision, and we are here to help you achieve it. Please contact me, or our team, with questions or whenever we may be of service: 440-974-0808 or randy.carver@raymondjames.com.

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The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Randy Carver and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.