The SECURE Act was signed into law on December 20, 2019. The bill, aimed at strengthening retirement security for Americans, features a mix of good and bad. Here are the most important takeaways, along with some commentary:
The Act pushes back the age at which retirement plan participants need to take required minimum distributions (RMDs), from 70 1/2 to 72, and allows traditional IRA owners to continue making contributions indefinitely
In case you're unfamiliar with the RMD, it's basically a forced distribution made from one's retirement account. The government needs the taxes you've been deferring for years! Here's how RMDs work:
Historically, the initial RMD had to be made the year you turned 70 1/2. You could postpone taking that initial payout until as late as April 1 of the year after you reached the magic age. However, you would then have to take your second RMD by December 31 of the same year. Since RMDs are taxed at ordinary income rates, one would incur a large tax bill if both RMDs were taken in the same year. In order to avoid this double-whammy, it's typically a good idea to spread the RMD over two years (take the first RMD in the year you turn 70 1/2 and the second RMD during the next year). Confused yet?
While the SECURE Act increases the age at which you must begin taking RMDs from age 70 1/2 to 72, this favorable development only applies to those who turn 70 1/2 after 2019. If you turned 70 1/2 during 2019, you're still required to begin your distributions under the old rules.
Under the new rules, you still have the option to postpone your first RMD until April 1 of the year after you turn 72. If you decide to postpone, remember the second RMD must be taken by December 31 of that same year. In order to avoid a large tax bill consider spreading the RMDs over two years.
The SECURE Act makes it easier for small business owners to set up "safe harbor" retirement plans that are less expensive and easier to administer
Small businesses will be able to join a pooled employer plan (called a MEP or Multiple Employer Plan), which is meant to reduce the cost of offering retirement plans to employees of small businesses. Bonus: If the employer plan has an automatic enrollment feature, they get a small tax credit.
Part-time workers will be eligible to participate in an employer retirement plan
While this is generally good news, the rules are somewhat restrictive: Employers have to include eligible part-time workers in the 401k plan. In this case, an "eligible employee" is defined as one that completes three consecutive years of service, working for 500 hours per year.
The Act mandates that most non-spouses inheriting IRAs take distributions that end up emptying the account in 10 years
Historically, beneficiaries could elect to take distributions from an IRA over their life expectancy. This "stretch IRA" feature has been scrapped for non-spouses in the SECURE Act. The maximum number of years a non-spouse beneficiary can take distributions is now 10 years. This is essentially a tax-grab by Congress.
The Act allows 401k plans to offer annuities
This was a big win for insurance companies - and their highly-paid lobbyists. I am not at all happy about this provision. I believe it's a bad deal for consumers because high-fee and commission annuities can now be sold to sponsors of 401k plans. Annuities aren't always bad, just mostly bad.
