The SECURE Act of 2019

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Joseph M. Press, CPA, CFE

While many of us might have been thinking that Congress was preoccupied with non-legislative extracurricular activities during the fourth quarter of 2019, they did manage to pass legislation with a sweeping impact on retirement savings plans in the form of the SECURE Act of 2019. How might this impact you?

Legislative History

The SECURE Act (Setting Every Community Up for Retirement Enhancement) was born in the House of Representatives as a bipartisan bill and in May 2019 passed in the House by a vote of 417-3.

A similar bill moved forward in the Senate as the Retirement Enhancement and Savings Act, and while it had bipartisan sponsorship, it failed to advance there.

Later, elements of both these bills were cobbled together and added to the 2020 spending bill titled Further Consolidated Appropriations Act 2020. President Trump signed this bill into law on December 20, 2019.  

The SECURE Act runs some 125 pages and contains approximately 30 provisions, mainly focusing on defined-contribution plans, impacting both employers and employees. The Act also makes changes to 529 plans. Many consider the SECURE Act to be the most sweeping changes to retirement savings since 2006. The balance of this article will deal with provisions, mainly impacting individuals/employees. 

IRA Contributions

Previously, individuals could not make contributions to a traditional IRA (whether deductible or non-deductible) after age 70 ½. Beginning in 2020, individuals will be allowed to make traditional IRA contributions without regard to age. This change brings the contribution rules for traditional IRAs more closely into alignment with 401(k) plans and Roth IRAs. Note that other limitations or exclusions could apply based on filing status, income levels, and participation in other qualified plans. 

Required Minimum Distributions 

If an individual turned 70 ½ prior to January 1, 2020, they are obligated to begin taking required minimum distributions (RMD) from their 401(k) plans or traditional IRAs. Under the new changes, these RMDs will be required beginning at age 72 for those turning 70 ½ after December 31, 2019. Original Roth IRA account owners continue to have no required minimum distribution requirements during their lifetimes.

Penalty-Free Withdrawals in case of birth or adoption

Generally, if an individual takes an early withdrawal (before age 59 ½) from a qualified plan, a 10% early distribution penalty tax is applied. Beginning in 2020, individuals can withdraw up to $5,000 to cover childbirth or adoption expenses without incurring the penalty tax. The applicable withdrawal must be made within one year of the birth date or the date on which the legal adoption is finalized.  

Elimination of the “Stretch IRA”

All the Act’s provisions previously discussed in this article were taxpayer-friendly and would reduce revenues to the federal government. Now comes the clawback.

Previously when certain beneficiaries inherited an IRA or 401(k), they could stretch the withdrawals and related tax payments over their life expectancy.

Now, inherited IRAs and 401(k)s of individuals that pass away after December 31, 2019, must be withdrawn/distributed within ten years of the death of the account holder. Beneficiaries exempt from this new rule include a surviving spouse, minor children, disabled or chronically ill individuals, and beneficiaries that are less than ten years younger than the account holder. 

Individuals and businesses responsible for administering defined contribution plans will need to become familiar with these changes to take advantage of opportunities and avoid pitfalls.