Quarterly HOT Topic: The SECURE Act

The SECURE act, which passed congress two days before Christmas, changes some rules for retirement plans.  If you don’t know about this yet, you need to learn more…as it will impact nearly everyone.

The SECURE legislation — which stands for “Setting Every Community Up for Retirement Enhancement” — puts into place numerous provisions! NOT all  are good!

The bill adds a couple of nice changes on qualified expenses for 529 plans…now allows for distributions for loan repayments (up to $10,000), secondary school, and apprenticeships payments.  Also, it reduces a provision within the special tax law of the “Kiddie Tax”….making it less severe.

Yet, by in large most of the bill is focused on retirement plans.  Added are some incentives, and rule changes for plan administration (employers) as well as changes to participation rules (individuals).
Like all legislation that has the best intentions, this bill is intended to strengthen retirement security across the country, yet some of the provisions will have negative consequences by eliminating what was referred to as “the Stretch Rule” to pay for itself.  Read on.

Retirement Plans:
Part of the bill may help the outlook for many workers who don’t have access to workplace retirement plans as the bill offers small businesses tax incentives to set up 401k plans.  Also, it allows small employers to join multi-employer plans, where they can band together to make it more cost effective.

For participants, it lowers the eligibility requirements for part-time employees, and for older employees the bill eliminates the maximum age cap for contributions if still working.  Also, it raises the age of the Required Minimum Distributions (RMD’s) to 72 from 70 ½ (finally some common sense dropping the ½ year thing).   Alias, if you already turned 70 ½ in 2019….too late for you, as you cannot defer 72, rather only those who’s 70 ½ age lands in 2020 or beyond can defer until 72.

While the above covers a few perks of the law, here comes the “stick”, or what pays for these perks.  The bill eliminates what was referred to as “Stretch Rules”.  The “stretch” referred to the previous ability of non-spouse beneficiaries (e.g. your kids) to inherit your IRA and stretch the required minimum distributions over their lifetime.  So for a 30-40 year old beneficiary, this meant stretching it over a 40-50 year period.  It was a basic estate planning technique, that cost participants nothing, and benefited everyone equally – permitting an option for your beneficiaries to defer the majority of their inheritance for as long as possible.  Now, instead, the government requires that the full inheritance be withdrawn (a taxable event) within a 10-year period – another money-grab of our government.  Further, if you happen to be in the prime age of your working years (likely), then BOOM…a larger windfall for the government.
While some politicians who favored eliminating the Stretch believe the it provided unfairly to the wealthy, in my view like most rule changes, its the middle class who pays, while the upper class can afford to pay attorneys instead, and set up sophisticated end-arounds of the law. 

I guess we’ll see, as they estimate an extra $15 billion in revenue from this change.  Time will tell if they see this revenue or folks found other ways.

Pete

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