What is the
Secure Act?

The Setting Every Community Up for Retirement Enhancement (SECURE) Act is a retirement bill that was included in a larger legislative package passed by the House of Representatives on December 17, 2019 and by the Senate on December 19, 2019. The bill includes reforms to DC Plans, DB plans, IRAs and 529 plans. The bill was signed into law on December 20, 2019 and effective January 1, 2020. 

The new law significantly changes one of the central functions employer-sponsored defined contribution plans intended for employees - to use a 401(k) or other qualified plan to lower one’s current tax obligation, defer them in the present, and withdraw them at a lower rate in the future. A key benefit of these plans was that if the totality of the funds weren’t withdrawn before the owner’s and their spouse’s death, the balance could be left to someone else and be spread over their lifetime. For most situations, this would likely be to decedents’ children in a lower bracket. 

When is the
Secure Act effective? 

Most provisions in the law became effective January 1, 2020. The Act states that the beginning RMD age is shifted to age 72 for those who reach the age of 70½ starting in year 2020. This would mean that those reaching age 70½ in 2019 would need to continue to take RMDs in 2020. The IRS may provide further guidance on this point so those who reached age 70½ in 2019 may want to speak with their tax advisor about their 2020 distribution approach. 

 If a person is younger than 59 1/2 and he/she inherits an IRA which is liquidated within the 10 years, does the 10% penalty apply because of his/her age? 

 Even before the Secure Act, generally, if the taxpayer receives distributions directly from the inherited IRA, the distributions are taxed, but the 10% penalty tax on premature withdrawals does not apply, even if the beneficiary is under the age of 59 ½. The Secure Act does not appear to have changed this other than to limit the time period (within 10 years) under which full distribution must occur. 

 Does the Secure Act grandfather beneficiaries who have started distributions from an inherited? 

 For anyone who inherited an IRA from an original IRA owner who passed away prior to January 1, 2020, no changes to your current distribution schedule are required. However, for situations where the original IRA account owner passes away after December 31, 2019, fewer beneficiaries will be able to extend distributions from the inherited IRA over their lifetime. Many will instead need to withdraw all assets from the inherited IRA within 10 years following the death of the original account holder. Exceptions to the 10-year distribution requirement include assets left to a surviving spouse, a minor child (who has not reached majority), certain disabled or chronically ill individuals, and beneficiaries who are less than 10 years younger than the decedent. 

What is not grandfathered in?

For anyone who inherited an IRA from an original IRA owner who passed away prior to January 1, 2020, no changes to your current distribution schedule are required. 

For anyone who reached age 70½ in 2019, they would need to continue to take RMDs in 2020. The IRS may provide further guidance on this point so those who reached age 70½ in 2019 may want to speak with their tax advisor about their 2020 distribution approach. 

If client has turned 70 ½ last year, can he/she discontinue payments this year and restart at age 72? 

The Act states that the beginning RMD age is shifted to age 72 for those who reach the age of 70½ starting in year 2020. This would mean that those reaching age 70½ in 2019 would need to continue to take RMDs in 2020. The IRS may provide further guidance on this point so those who reached age 70½ in 2019 may want to speak with their tax advisor about their 2020 distribution approach. 

Under the Secure Act, can someone who turned 70 1/2 in 2019 be able to contribute to his/her SEP/IRA in 2020 and going forward? 

For taxable year 2020 and beyond, the law removes the age limit at which an individual can contribute to a traditional IRA. Today, an individual cannot contribute after age 70½; the Act allows anyone that is working and has earned income to contribute to a traditional IRA regardless of age. (Note: Make sure your IRA has adapted to the change and enhances its capabilities to allow contributions after age 70½.) As a reminder, the deadline to make a Current Year 2020 IRA contribution is April 15th, 2021. 

How does the Secure Act impact Roth IRAs? 

The new 10-year rule applies to all qualified plans; these include 401(k), 403(b), governmental 457(b), ESOPs, Cash Balance plans, 401(a) plans (defined contribution), lump-sum distributions from defined benefit plans, and IRAs. IRAs are usually the rollover recipient vehicle of all these other plans. 

Roth IRAs (which can, and should be, the recipient vehicle of Roth 401(k) balances) do not have a lifetime Required Minimum Distribution requirement. An owner can leave his/her Roth to grow until his/her death, leave it to his/her spouse, who can opt to make their spouse’s Roth IRA his/her own and allow it to grow it until he/she dies. The second spouse can leave it to his/her children, who can then allow it to continue to accumulate tax-free for another 10 years. 

How will the new law affect distributions upon the birth or adoption of a child? 

Upon the birth or adoption of a child, the law permits an individual to take a "qualified birth or adoption distribution" of up to $5,000 from an applicable eligible defined contribution plan or IRA. This distribution is not subject to the 10% early withdrawal penalty. 

Under portability, if a client retires and has selected an plan’s annuity, can it be rolled over to another annuity without penalty? 

Portability under the Secure Act has to do with lifetime income options. The Secure Act permits participants to make direct trustee-to-trustee transfers of annuity contracts of “lifetime income investments” that are no longer authorized to be held as investment options under a qualified defined contribution, 403(b) plan, or governmental 457(b) plan, without regard to any plan restrictions or penalties on in-service distributions. 

 This communication is for use by financial and insurance professionals only and not intended for distribution or use with the general public. It is complete and accurate to the best of our knowledge as of January 2020 and provided for educational and informative purposes only. It is not for the purpose of providing legal or tax advice. Recipients should consult with their own experts to obtain legal, accounting or tax guidance and direction with respect to any issue or question. 

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Designed for insurance financial professional use.

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