Implications of the SECURE Act

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A new year signals a new course for retirees and their retirement saving plans. As part of the 2020 government appropriations bill, the SECURE Act (Setting Every Community Up for Retirement Enhancement Act) was signed into law. While the bill does include breakthroughs for some businesses and their employees, there are several setbacks for investments made by retirees. 

Arguably, the biggest setback includes the elimination of the Stretch IRA in section 401 of the SECURE Act. Prior rules and regulations permitted the inheritance of an IRA from a deceased account holder to have its contributions distributed over the course of the inheritors life span. Effective December 31, 2019, the SECURE Act now places a ten year cap on inherited IRA’s and mandates that the inheritor withdraw the entirety of the funds by year ten. This could potentially lead to a tax nightmare for inheritors if the language of the trust or IRA is not reflective of the new law. Fortunately, for those who have already inherited an IRA before the law went into effect, the new rules will not apply.  

Although the Stretch IRA has been replaced with a ten year rule, not all aspects of the law are detrimental for the retirement investor. Section 107 of the SECURE Act repealed the maximum IRA contribution age of 70 ½ and raised the age to take required minimum distributions to age 72. Seen more as a breakthrough for IRA investments, individuals can continue to contribute to their IRA as well as prolong their RMDs – a significant benefit for individuals 50 or older who saw their IRA contribution cap increased in 2019. Similarly to the changes made to the Stretch IRA, these rules will only impact individuals who did not reach the age of 70 ½ years old in 2019. 

Small businesses received benefits from the new law. Starting in 2021, employers will have the opportunity to provide retirement benefits to their employees through a Pooled Employer Plan or PEP. As long as the PEP covers less than 100 employees, or in some cases fewer than 1,000 employees, employers with uncommon business interests will be able to band together to offer their employees retirement plans. This is a reversal of previous legislation that only allowed for closed Multiple Employer Plans and expands the opportunity for small business employees to receive retirement benefits. 

The SECURE Act also put into place protections for part-time employees in the form of retirement benefits with a few minor stipulations. As long as the employee has worked a minimum of 500 hours for at least three consecutive years and is of age 21 or older, they are eligible to receive retirement benefits. The downside is that this part of the bill does not go into effect until January of 2021 and the hours accumulated for three consecutive 12 month periods will not be counted until the effective start date; which means part-time employees will not be able to accumulate retirement benefits under this law until 2024. 

Changes were made to 401(k) investments as well, however it is yet to be seen how the legislation will impact investments. Currently, the IRS is still assessing how the legislation will specifically impact the inclusion of annuities in 401(k) plans. This also includes whether or not withdrawal rules or fee structures are going to be affected. Further, there are no indications about what types of annuities can be included, nor who makes the decision to include an annuity in a retirement plan. Annuities have been included in some 401(k) plans in the past, but with safe harbour regulations being included in the legislation, the SECURE Act may make it safer and more popular for annuities to be included. What can be seen as a benefit for 401(k) plans is that investors will have the ability to contribute more to their retirement plan due to the cap increase. 

Ultimately, the SECURE Act heavily favors insurers, employers and their employees while falling short in protecting legacies typically left in the investments of retirees for their beneficiaries. On the other hand, the language of the law expands access to retirement benefits, which includes increases in investment caps into 401(k) plans, the allowance of PEPs, and the eventual insurance of part-time employees. The elimination of the Stretch IRA has the potential for a major tax nightmare for benefactors despite the burden of taking RMDs being lifted to age 72. Further, as new distributions rules set forth by the IRS plan to be enacted in 2021, holders of IRA accounts must take the time to understand how their retirement plans will be affected. No matter how close individuals are to retirement, this legislation set forth major implications on how investors will save and distribute their money in the future. 

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