The Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed in December 2019 and it made significant changes to laws related to retirement accounts such as IRAs and 401k’s. Hopefully, you have one or more of these types of retirement accounts and so the SECURE Act will affect you or your heirs.
Three Main Provisions
The three most significant provisions of the SECURE Act are as follows:
- Creation of Multiple Employer Plans (MEPs), which allows multiple employers (probably small businesses) to band together to offer 401k plans to its employees.
- Required Minimum Distributions (RMDs) are changed from age 70.5 to age 72.
- “Stretch” retirement plan distributions are eliminated in most cases. When a child inherits their parent’s retirement account, the child must take distributions over a 10 year period instead of over the remaining life expectancy of the heir.
MEPs are good because they should incent employers to offer retirement account benefits to their employees in a cost-efficient manner. Rather than doing all of the paperwork themselves, by joining a MEP, the employer can save on back-office paperwork as well as potentially on the cost by joining a group that is offering a MEP. It’s not like the employer needs to reach out to other employers and take the initiative to start the MEP. Instead, it is likely that the impetus to start the MEP will come from the custodian or investment manager, meaning that the employer who throws in with the MEP may not know who the other employers in the MEP are. The benefit is to the employees, including potentially the small business owner itself, because one can save a lot more for retirement each year in a 401k than they can in an IRA, plus there is the potential for employer contributions in addition to the employee’s savings. With the demise of traditional defined-benefit pension plans in the private sector workforce, the Government is attempting to incent workers to save for retirement on their own, and that is a good thing for everyone.
If you are already subject to RMD under the old law (age 70.5), then you will continue to be subject to that law’s RMD. But if you don’t turn 70.5 until this year or thereafter, you will be subject to the new law which requires minimum distributions of retirement accounts starting at age 72. The objective is to ensure that the government gets its money while at the same time helping to ensure that people have enough money when they live to be really, really old.
Death of the Stretch
Other financial planners are calling it the “death of the stretch”. If you are a “Designated Beneficiary”, which means just what it says (the beneficiary so designated in the decedent’s retirement plan documentation), you must take a full distribution of the decedent’s retirement plan within 10 years. The exception is if you are an “Eligible Designated Beneficiary”, including the following: Spouse, Disabled Person, Chronically Ill, A Beneficiary not more than 10 years younger, or a minor child. Eligible DB’s will still have the ability (but not the obligation) to stretch their inherited retirement account over their own life expectancy.
The rationale behind the “death of the stretch” is that the government wants the money that it considers it’s own. This all has to do with Traditional IRA and 401k accounts. Remember, if you have a Traditional retirement account, you made your contributions to that account pre-tax, and when you withdraw money from that account when you are old enough to do so, your withdrawal is taxed at ordinary income rates. By shortening the time period by which an heir can withdraw from their inherited accounts, it also shortens the time by which the government gets its tax money. 10 years is still a long time over which one can withdraw inherited retirement money.
The MEP provision will be particularly helpful to small businesses that don’t already have a 401k plan, and it could also be helpful to investment managers (such as yours truly) who want to set up MEP plans in an effort to grow their assets under management. If all of this piques your interest, please contact me so that I might help you out.