Understanding the SECURE act

by David Jackson, MBA, CFP®, C(K)P^™

One important aspect of my role as a financial advisor is to monitor changes in state and federal legislation that could impact our Southern Springs clients. We have recently received several questions on the SECURE Act that passed in the U.S. House of Representatives in May. While there are several aspects to the proposed legislation, I wanted to use this blog post to outline what I think are the provisions that could potentially have the most impact for our clients.

The Setting Every Community Up for Retirement Enhancement Act of 2019 (you have to hand it to the politicians when it comes to branding) passed the U.S. House by a vote of 417-3. In today’s polarized times, anything that passes with that kind of majority should get our attention. The legislation now moves to the U.S. Senate for consideration.

Below is a quick outline of what we see as the potential positive impacts of this legislation, and one potential concern our clients should be aware of if the law is enacted.

The Positives

While I’m not going to list them all here, the Act has 29 provisions that are aimed at increasing access to tax-advantaged retirement accounts, as well regulations aimed at helping to prevent older Americans from outliving their assets.

Many Americans are choosing to work longer for a variety of reasons. In recognition of this, the law would eliminate the age limit of contributing to a traditional IRA. It would also push back the age that required minimum distributions from traditional retirement accounts (RMD’s) from age 70 ½ to age 72.

Many workers also do not have a tax-advantaged retirement plan available through their employer. The proposed rules would help in that regard. There would be a tax credit of $500 available for employers who set up a 401k or Simple plan with automatic enrollment for employees. Employers could also receive a 50% tax credit for retirement plan start-up costs up to $5,000.

There are also provisions to help smaller employers join together to create multi-employer plans with a pooled plan provider handling the administration, which could help reduce start-up and administrative costs.

Many part-time workers have also not been able to participate in their employer-provided plans. The Act would let employers include some part-time employees in their 401k plans: those that work more than 1,000 hours, or those that have worked 500 hours for three consecutive years.

Student loan debt has also been in the news quite a bit lately. The SECURE act would take one step to help address student loan debt by allowing up to $10,000 in distributions annually from 529 plans for qualified student loan payments.

One Concern

Overall, most of the provisions are overwhelmingly positive, however there is a key one that might cause concern. The act makes big changes to the rules governing what are commonly known as “stretch IRAs.”

Under the current law, IRA beneficiaries are allowed to stretch IRA distributions over their lifetimes. Many of our clients have taken advantage of this provision in their tax planning and have encouraged their beneficiaries to take advantage of this. If enacted, the SECURE Act would eliminate this provision. Non-spouse beneficiaries would have to take distribution of IRA funds within 10 years of the IRA owners’ death. There are some exceptions to this, including if the beneficiary is a minor, disabled, or chronically ill, or if they are not more than 10 years younger than the deceased IRA owner. For minors, the 10 year clock would not start until they reached the age of majority.

To summarize, the SECURE Act, if enacted, contains lots of good provisions that should help employees and employers with lowering their tax obligations or operating expenses. However, it makes big changes to the current “stretch IRA” rules, which might necessitate changes in retirement and estate planning strategies for some of our clients.  

If you’ve got questions about any of these provisions, or any of the others that I didn’t mention, please give us a call, or schedule a time to come see us.

Any opinions are those of the author and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Investing involves risk and investors may incur a profit or a loss. Past performance is not a guarantee of future results.