Secure Act Summary

By Kelly Olson Pedersen, CFP®

The Secure Act — which stands for “Setting Every Community Up for Retirement Enhancement” — enacts many new provisions intended to strengthen retirement security across the country.*

IRA Beneficiary Distribution Changes (“Stretch” IRA** Eliminated for Many):

Prior Law:
If you were a beneficiary of an IRA and you were not the spouse of the deceased, you were forced to withdraw funds from the IRA that were taxed annually. The inherited asset had to be withdrawn at a rate over your lifetime (determined by a table provided by the IRS), however you could take it faster. The ability to “stretch” these withdrawals over a longer time span minimized the impact of taxable income for the beneficiary and lessened the likelihood of bumping them into a higher tax bracket.

New Law:
Now you must take the IRA distributions within 10 years of the original owner’s date of death. There is no mandate that you take it every year except that in year 10 it is required to fully distribute.

Situations to Consider:
Trusts that are named as a beneficiary of an IRA: Depending on how a trust is drafted, it may be possible that because the distributions are not required annually but instead required just in the last year, the trustee of a trust does not have control over the timing of the distributions. Having to take 100% in year 10 would likely cause an adverse tax effect. If the amounts are passed directly to beneficiaries, they will have a large tax bill. If the distribution is required to stay in the trust, it likely will be subject to trust tax rates which get quite high, quite quickly (37% rate after $12,750 of income).

Tax brackets of the beneficiary: Typically, adult children are named beneficiaries of their parents’ IRA assets. Upon receiving the IRA, likely after the death of the second parent, the children may experience significantly higher taxable income which may be during their peak earning years.

Notable:
**The law not only applies to traditional IRAs but to 401(k)s and some other defined benefit plans.  Exceptions are 403(b) and 457(b) plans that have a 1/1/2022 start date. Annuities that are already annuitized over life are irrevocably exempt.
^***Exceptions to this withdrawal timetable include spouses, minor children (only until age of majority), persons with disabilities, chronically ill or a beneficiary within 10 years of the age of the IRA owner.  These groups will take distributions over their lifetime.

IRA Contributions and Required Distributions Age Change to 72:

Prior Law:
Prior to the Secure Act, the account owner could not make contributions after turning 70 ½ and must start taking required distributions at age 70 ½ (or delay to April 1 after turning 70 ½).

New Law:
Required distributions will now start at age 72 (or delay to April 1 after turning 72) and contributions may also be made until age 72 so long as there is earned income to permit. Spousal contributions are included. The law does NOT preclude Qualified Charitable Donations (QCD) starting at age 70 ½, up to $100,000 of donations.

Situations to Consider:
There are provisions in the law to thwart someone from contributing to the IRA and then taking out QCD. The contribution will be netted out of the QCD.

Penalty Free $5,000 Withdrawal for Adoption or Birth:

Prior Law:
Withdrawals before age 59 ½ incurred taxes and a 10% penalty for early withdrawal.

New Law:
Now with the Secure Act, $5,000 may be withdrawn penalty-free (taxes still applicable) for a qualified birth or adoption, if taken within one year from the date of birth or adoption. This can be done per child and per parent if each parent has a qualified account. Parents would have an opportunity to repay the account in the future for the amount of the funds taken out above the annual limits.

Annuities in 401(k)s Made Easier to Buy:

Prior Law:
Fiduciaries were at risk in a retirement plan if there was an annuity investment option and the annuity wasn’t able to meet its obligations, among other things.

New Law:
The Secure Act removes much of the risk so long as the Fiduciary provided objective, thorough and analytical searches for carriers. Now, most of the onus is put on the insurance companies. There is much more to this rule but one thing standing out is the ability to have the annuity become portable if you should leave the retirement plan instead of a forced sale or surrender.

Situations to Consider:
Before purchasing an annuity within your 401(k), ask about the portability nature of it. The law will permit it to roll out to an IRA and we will likely be seeing a lot of smaller annuity products rolling out of 401(k)s. Individuals will need to strongly consider whether an annuity is right for them taking into consideration that fees associated with it that are intermingled in the product itself. Annuities are not as easy to unwind as mutual funds.

Proponents say annuities can offer a steady stream of income to retirees through retirement and encourages savers to think about the long-term. However, annuities are complex investment products, and the wrong choice can be detrimental to a person’s portfolio. Employees should review their options and consult a financial adviser before moving forward with a plan. Annuities could result in heftier fees and penalties if used incorrectly. Critics argued the bill was a major win for the insurance industry, which lobbied for it.

Small Business Retirement Plan Credit (and Auto Enroll):

Prior Law:
Small businesses were eligible for a credit up to $500 for up to three years to compensate for the start-up costs of a plan.  Many plans state that 1,000 hours was the minimum amount of time worked to be eligible for the plan.

New Law:
Now the maximum credit is the greater of $500 OR the lessor of: $250 times the number of employees eligible to participate or $5,000. For those small businesses who also adopt an auto enrollment program, they will be allowed a $500 credit. Eligibility requirements have largely decreased from the prior 1,000 hour minimum to 500 hours minimum hours worked to become eligible.

Repeal of the TCJA Kiddie Tax Bracket Changes Back to Parent Brackets:

Prior Law:
The Tax Cuts and Jobs Act (TCJA) changed the taxation of unearned income of certain children to become subject to the brackets of trust taxes, instead of their parent’s tax bracket. Therefore, any income over $12,750 was subject to the 37% tax bracket.

New Law:
The Secure Act reverts the tax brackets back to the parent’s brackets.

Situations to Consider:
Parents can elect to amend returns for 2018 and 2019 to pick their preferred method for taxation.

529 College Savings Plans Uses Expanded:

Prior Law:
The TCJA expanded the use of 529 funds to allow for up to $10,000 of annual funds to be used for K-12 expenses.

New Law:
Additionally, the Secure Act will allow for apprenticeship programs (books, fees, supplies, etc). Also, Qualified Education Loan Repayment distributions may be used to pay the principal and/or interest of a qualified education loan up to a limited lifetime distribution of $10,000. This change is retroactive to the beginning of 2019.

Medical Expense Deduction Hurdle Rate Back to 7.5%:

Prior Law:
Medical expenses can be deductible so long as they are greater than the 7.5% rate of your Adjusted Gross Income. The TCJA had raised this rate to 10% going forward, but allowed for a 7.5% retroactive rate for 2018.

New Law:
Allows for the rate to be 7.5% for 2019 and 2020.

Situations to Consider:
Review all medical expenses to see if they would be deductible.

Disaster Relief Provisions:

Prior Law:
Limited the disaster withdrawal mentioned below to $50,000.

New Law:
Having principal residences in a federally declared disaster area who suffered an economic loss as a result of that disaster could take a distribution of up to $100,000 from an IRA penalty free. An election can be made to treat the distribution as if it was taken over 3 years. It may also be repaid to the IRA in three years.

Tax Extensions:

Made retroactively from 2018 through 2020 only:

• Mortgage insurance premium deductions
• Qualified tuition deductions

*The information provided is based on information provided by you and is only an estimate based on that information. Caissa Wealth Strategies does not offer tax planning or legal services, but may provide references to accounting, tax services or legal providers. They may also work with your attorney or independent tax or legal advisor. A qualified tax professional or independent legal counsel should review the tax implications of any securities transaction. This material is not intended to replace the advice of a qualified attorney, tax advisor, financial advisor, or insurance agent.  Before making any financial commitment regarding the issues discussed here, consult with the appropriate professional advisor.