Dissecting what the SECURE Act means for retirement plans

The SECURE Act, which stands for “setting every community up for retirement enhancement,” became effective Jan. 1, 2020. Jeffrey Spencer, principal at Ciuni & Panichi, says the law is likely the biggest change to retirement plans since the Pension Protection Act of 2006.

“The SECURE Act encompasses a host of provisions that increase the ability for people to save for retirement — either on their own through IRAs or retirement plans that their employers sponsor,” Spencer says. “Because the problem of retirement will only worsen as baby boomers retire, the ability to count on Social Security lessens, and millennials follow the trend of not saving enough.”

Smart Business spoke with Spencer about how the SECURE Act could affect both individuals and employers.

How does the SECURE Act impact the stretch IRA?

A stretch IRA was an estate planning strategy to shelter inherited IRA assets and income. You might pass your IRA down to your children, who could utilize it over the rest of their lives, without being taxed upfront. Based on their life expectancy, non-spouse beneficiaries would take a small required percentage annually, as the remaining funds continued to grow tax deferred. The SECURE Act effectively ended the stretch IRA. Now, a non-spouse beneficiary must liquidate the entire IRA within 10 years of the death of the original account owner. This generates revenue because withdrawals can be taxed sooner.

With the new 10-year limit on inherited IRAs, what are the planning challenges?

This mainly impacts the non-spouse beneficiaries of people with large amounts in their retirement accounts, such as C-level executives. An inherited IRA of $10,000 is less of an issue than $100,000-plus, which can impact your income tax bracket on a federal and/or state level. (Roth IRAs are excluded from taxable income but are required to follow the new 10-year rule.)

Higher income can affect Social Security taxation; Medicare Part B & D premiums; Income-Related Monthly Adjustment Amounts (IRMAA); interest taxation; qualifying for tax deductions or credits; and capital gains or dividend taxation. Another consideration is the Free Application for Federal Student Aid (FAFSA) and/or College Scholarship Service (CSS) Profile. If beneficiaries take too much one year, they may earn, in the government’s eyes, too much for financial aid. Also, some student loan payment rates are based upon income.

What can minimize these potential impacts?

Beneficiaries should work with an accountant and financial adviser. They don’t need to take funds every year and it doesn’t need to be the same amount each time — as long as the account is empty by year 10. That’s why it’s critical to create a withdrawal strategy, which looks at tax deductions and credits and utilizes planning and educated assumptions to minimize the impact. Also, beneficiaries who are 70.5 and older can give the inherited IRA money directly to a charity with no tax consequences.

Where do age limits differ under the act?

Previously, you couldn’t fund a traditional IRA, starting the calendar year you turned 70.5. With the SECURE Act, there are no age limits. This helps people who A) want a tax deduction, B) don’t have an employer plan, or C) are looking to fund a Roth IRA but were excluded due to income and/or tax filing thresholds.

In addition, seniors had to start taking minimum distributions at age 70.5. The SECURE Act pushes that to 72, starting with those who turn 70.5 in 2020.

How does this law impact businesses?

Under the law, more part-time employees can defer income. If you work at least 500 hours three consecutive years, your employer cannot preclude you from contributing to a 401(k).

The SECURE Act also enables small or midsize employers to join open multiple employer plans (MEPs) more easily. This is where unrelated employers sponsor retirement plans through a third party. The new rule separates out bad apples that aren’t administrating the plan properly — so it doesn’t taint the whole plan for all members.

The takeaway for executives is, make sure you take advantage of these new rules. If your company has a pre-existing retirement plan, you’ll still have to amend your plan and comply with the new rules as they come online over the next few years.

Insights Accounting is brought to you by Ciuni & Panichi, Inc.