The U.S. Congress and President Donald Trump recently passed the bipartisan Setting Every Community Up for Retirement Enhancement (SECURE) Act as part of another spending bill needed to keep the federal government operating for a few more months. The SECURE Act represents one of the biggest changes to retirement planning since 2010, and though there are some negative elements, on balance it has the potential to improve taxpayers’ ability to save for retirement. Following is a brief summary.
• Annuities are now allowed in 401(k) plans. If the insurance industry – which lobbied hard for this feature – limits offerings to basic deferred income or single premium immediate annuities, this would be a beneficial change. However, if they instead start flooding 401(k) plans with all kinds of expensive and difficult-to-understand annuity variants and promote them as solutions to every possible retirement need (as has occurred in the nonqualified marketplace), plan participants could easily be misled and end up making bad savings choices. And the new law exempts plan administrators from the fiduciary requirement of performing due diligence on such offerings before including them in a company’s 401(k), further adding to the potential risks.
• Inherited IRA and Roth accounts become more limited. The so-called stretch provision – which allows heirs to stretch withdrawals over their lifetime to allow the accounts to continue to grow tax-deferred (with IRAs) or tax-free (with Roths) – is now limited to only 10 years. The yearly withdrawal amount is left up to the account owner as long as the account is emptied by year 10. Accounts that were inherited prior to 2020 will still retain their current stretch provision, as will accounts for certain types of beneficiaries such as surviving spouses, minor children, beneficiaries no more than 10 years younger than the deceased and the disabled.
• Required minimum distributions (RMD) are delayed. Instead of RMDs beginning in or just after the year you turn age 70 1/2, you can now wait until age 72 before having to make withdrawals from your IRA or 401(k) plan. This is good for everyone in that it allows such retirement accounts to continue to grow tax-deferred for an extra year or two. Unfortunately, those reaching age 70 1/2 by 2020 will have to follow the old rules.
• Multiple employer plans (MEP) are easier to set up. Previously, companies could not jointly create an MEP such as a 401(k) unless they had some kind of organizational relationship such as membership in a common trade group. The new law eliminates this requirement, allowing totally unrelated businesses to band together to gain scope and economies of scale in creating retirement plans for their employees. Furthermore, the business tax credit for establishing retirement plans will be increased. These are real benefits for small businesses.
There are also some miscellaneous benefits that are not directly related to retirement. 529 Education Savings Plans can now be used to pay down up to $10,000 of student debt, which previously had not been a qualified expense. In addition, apprenticeship programs registered with the Department of Labor will now qualify for 529 funding.
The SECURE Act also undoes some provisions of the 2017 Tax Cuts & Jobs Act, such as reducing the medical expense deduction threshold back to 7.5% of adjusted gross income and reverting the “Kiddie Tax” rate (the rate children pay on earnings) from trust tax rates back to their parents’ top marginal rate.
As with any major legislation, there will inevitably be unintended consequences requiring followup changes over the next few years. On balance, I view this new law as positive for retirement savers as long as there are sufficient protections put in place to ensure that the new 401(k) annuities are appropriately positioned and reasonably priced.