The SECURE Act Overview

The SECURE Act includes several incentives to start saving sooner, and keep saving longer.

· Initial RMD increases to age 72 – Until now, you had to start taking Required Minimum Distribution (RMDs) out of your traditional IRA at age 70 ½. RMDs are then taxed at ordinary income rates. Now, you don’t need to begin taking RMDs until age 72. Rules for qualified charitable distributions (QCDs) and Roth IRA withdrawals remain unchanged.

· IRA contributions for as long as you’re employed – If you work past age 70 ½, you can now continue to contribute to either a Roth or a traditional IRA.

· Expanded participation for long-term, part-time employees – Even if you’re a part-time employee, you may now be able to participate in your employer’s 401(k) plan.

· Additional small-business incentives – The SECURE Act provides a few other tax breaks and credits to help small businesses open and operate employer-sponsored retirement plans for their employees.

Non-Spouse Stretch IRAs Mostly Go Away.

Presumably to offset the expected reduction in federal income tax collections due to increasing the RMD age to 72 the Act eliminates the use of stretch IRAs for most non-spouse beneficiaries.

With some exceptions, heirs will now be required to move assets out of inherited IRA accounts within ten years after receiving them, thus having to pay taxes on the proceeds much earlier than under the old law.

There is also concern that estate plans and trusts written to take advantage of the stretch IRA will require immediate attention.

Ten Year Payout Rule

The most notable change resulting from the SECURE Act, is the elimination of the so-called “stretch” provision for most (but not all) non-spouse beneficiaries of inherited IRAs and other retirement accounts. Under current law, non-spouse designated beneficiaries can take distributions over their life expectancy, but for many retirement account owners who pass away in 2020 and beyond, beneficiaries will have ‘only’ 10 years to empty the account. The good news is there are no other distribution requirements within those 10 years, so designated beneficiaries will have some flexibility around the timing of those distributions.

Example: On January 20, 2020, Bill’s father passed away, leaving Bill his $400,000 IRA. Bill, who is currently age 60, is still working and earns roughly $150,000 per year, but plans to retire in 5 years, at age 65.

Given the fact that Bill’s income will substantially decrease when he retires, it may make sense for him to avoid taking any distributions from the inherited IRA while he is still working (i.e., during the first 5 years of the distribution window provided by the 10-Year Rule). Instead, he can opt to distribute the funds during years 6-10, when he expects his income to be much lower after his wages are gone (and before he begins Social Security benefits).

Eligible Designated Beneficiaries Not Subject To the New Ten-Year Rule

Notably, while the new general rule under the SECURE Act will be the 10-Year Rule, there are five groups of designated beneficiaries to which the new 10-Year Rule will not apply.

 These beneficiaries, referred to as “Eligible Designated Beneficiaries”, are:

· Spousal beneficiaries;

· Disabled beneficiaries;

· Chronically ill beneficiaries;

· Individuals who are not more than 10 years younger than the decedent

· Certain minor children (of the original retirement account owner), but only until they reach the age of majority.

It is also important to note that this rule does not apply to those beneficiaries who have already inherited a retirement plan (prior to 2020).

Elimination of IRA contribution restrictions

In more good news for those closing in on age 70 ½, the Act lifts the prohibition on Traditional IRA contributions once an individual reaches the year in which they turn 70 ½. This is significant because under current law Traditional IRAs are the only retirement account for which contributions are not permitted due to (old) age in the first place.

Thus, beginning in 2020, individuals of any age will be allowed to contribute to a Traditional IRA. The requirement that such individuals have “compensation” – which is generally earned income from either wages or self-employment – to make such a contribution remains. As such, only those individuals who are 70 ½ or older and who are still working (or who have a spouse that is still working and are contributing under the Spousal IRA rules), will be able to take advantage of this change.

Qualified Charitable Distributions (QCDs) Still Allowed At 70 ½

The SECURE Act makes no changes to the date at which individuals may begin to use their IRAs (and inherited IRAs) to make QCDs. Thus, even though an individual turning 70 ½ in 2020 will not have to take an RMD for 2020, they may still use their IRA to make a QCD of up to $100,000 for the year (after actually turning 70 ½ or later). Beginning in the year an individual turns 72, any amounts given to charity via a QCD will reduce the then-necessary RMD as well (while in the prior 1-2 years, it will simply allow the pre-tax IRA to be used for charitable contributions directly on a pre-tax basis).

The SECURE Act also contains an anti-abuse rule that coordinates post-70 ½ Traditional IRA contributions with QCDs. Under the rule, any QCD will be reduced by the cumulative amount of total post-70 ½ IRA contributions (but not below $0) that have not already been used to offset an earlier QCD. Effectively ensuring that individuals don’t just ‘recycle’ post-70 ½ IRA contributions into subsequent QCDs.

Example: Sam turns 70 ½ in 2020, but is still working part-time, earning $15,000 per year. In order to minimize his taxable income, Sam makes a $7,000 (including his over-age-50 catch-up) deductible contribution to his Traditional IRA. He continues to do the same for three more years (for a total of $28,000 of post-70 ½ Deductible Traditional IRA contributions), at which point he retires.

In 2027, Sam has an unusually large charitable streak and decides to make a $40,000 ‘QCD’, his first such distribution, to charity. Despite following all the QCD rules, Sam will ‘only’ be entitled to claim a QCD of $40,000 – $28,000 = $12,000. The remaining $28,000 given to charity can be claimed as an itemized deduction.

Required Minimum Distributions (RMDs) To Begin At 72

The SECURE Act pushes back the onset of RMDs from age 70 ½ to age 72. It’s not a huge change, but any RMD relief is welcome news for those who don’t want them and will only take them because they are forced to do so.

Mirroring current law, individuals upon reaching the requisite age (now age 72 instead of 70 ½) will still be able to delay their first RMD until April 1 of the year following the year for which they must take their first RMD (the required beginning date). Thus, an individual turning 72 on February 2, 2021 can timely take their first RMD until as late as April 1, 2022. However, if the first RMD is not taken in the year an individual turns 72, but is instead taken the following year (by April 1), a second RMD will also still need to be distributed that year (the year the individual turns 73) by the end of the year. But either way, the first age-72 RMD will always be calculated using the age 72 life expectancy factor.

Notably, this change to the new required beginning date for RMDs only applies to those individuals who turn 70 ½ in 2020 or later. So even though an individual turning 70 ½ on December 20, 2019 will not yet be 72 in 2020, they will still be required to continue RMDs under the existing rules, and to take an RMD for 2020 (and each year thereafter).

Planning after the SECURE Act

1. Review Your Beneficiaries. Because the SECURE Act changes the outcome for many inherited retirement accounts to be distributed in a shorter time period, now is the time to review your beneficiary designation. Beneficiary designation on IRAs and 401(k)s determines who the accounts will pass to once the owner dies. If the goal of the original retirement account owner is to give lifetime income to a child, you might want to reconsider the strategy or the beneficiary designation. As an alternative, a charitable remainder trust could be used as a beneficiary with the child as the lifetime income beneficiary to provide you with a lifetime income.

To Avoid Disaster, Take a Close Look at Your Trust.
If you were using a trust as a beneficiary of an IRA or 401(k) in order to achieve creditor protections and take advantage of the stretch provisions through a “pass-through” trust, there could be a huge issue with your

1. plan now that the SECURE Act passed. Most of these conduit or pass-through stretch trusts for IRAs were set up to pass through RMDs to the beneficiary. However, if the trust language states that the beneficiary only has access to the RMD each year, under the new rules, there is no RMD until year 10 after the year of death. This means the IRA money could be held up in the trust for 10 years and then all be distributed as a taxable event on year 10.

2. Perform a Tax Review.  The RMD rules are expected to be a huge tax revenue generator for the federal government. As such, review your tax situation and how the new rules will impact the true amount of legacy and wealth you are passing on to your children. In some cases, it might make sense to leave your IRA to a charity and purchase life insurance for your children or a charitable remainder trust to maximize legacy benefits.

3. Consider Doing Roth Conversions.  While Roth IRAs are subject to RMDs when inherited, they typically do not cause a taxable event when distributions are taken by a beneficiary. As such, it can make a lot of sense (with lower tax rates under the Tax Cut and Jobs Act) before the owner of the IRA passes away to strategically do Roth conversions to move money from an IRA to a Roth IRA.

4. Execute RMD Planning.  Lastly, if you have an IRA or retirement account, you need to get a retirement income plan in place. This means understanding your RMDs, when they will begin, which accounts you need to withdraw from, and how the withdrawals will impact your taxes and other retirement benefits, like Social Security or Medicare. Prior to retirement, it might make sense to do Roth conversions or to roll money into an IRA to better manage RMDs. Additionally, strategies like Qualified Charitable Contributions — where you give money directly from an IRA to a qualified charity (thus reducing RMDs) — can be powerful planning strategies with the new RMD age of 72.

Provisions to Encourage the Adoption And Use Of Retirement Plans Amongst Small Businesses

Some important provisions were also made for small businesses to further encourage their adoption and use of employer retirement plans for their employees.

Small Businesses Can Get a (Bigger) Tax Credit for Establishing a Retirement Plan

Currently, small businesses are eligible for a credit of up to $500 for up to three years for startup costs related to establishing a small business-sponsored retirement plan, such as a 401(k), 403(b), SEP IRA or SIMPLE IRA. Such businesses are defined as businesses with 100 or fewer employees receiving $5,000 or more of compensation.

For tax years beginning January 1, 2020, the maximum credit available (for up to three years) will be increased to the greater of:

· $500; or

· The lesser of:

· $250 × the number of non-highly-compensated employees eligible to participate in the plan; or

· $5,000.

New Credit for Adoption Of Auto-Enrollment By A Small Business

In order to qualify for the $500 credit, a small business must adopt an “Eligible Automatic Enrollment Arrangement”. In general, such arrangements require plans to treat participants as though they have elected for the employer to make contributions to the plan at a specified percentage of compensation, until affirmatively notified by the participant to do otherwise.

The credit is first available for tax years beginning in 2020, and can be claimed in the year the auto-enrollment option is first adopted by the plan, as well as the two following years (provided the provision continues to be maintained by the plan during those years).

Notably, the Auto-Enrollment Option tax credit is based on when the auto-enrollment option itself is added – not when the plan is created.

Long-Term Part-Time Workers Provided Greater Access to Employer Plans

Under current law, employers can generally exclude employees from participating in a 401(k) if they have not worked at least 1,000 in a single plan year. This leaves many part-time workers, even those who have worked for many years, unable to participate in an employer’s plan.

The SECURE Act attempts to mitigate this issue by creating a ‘dual entitlement’ system for most employer retirement plans, in which the ‘old’ 1,000-hour rule still applies, but where employees must also be eligible to participate in the plan if they have worked at least 500 hours in at least three consecutive years. Thus, individuals must be eligible to participate in an employer plan upon completing either requirement.

These changes apply to plan years beginning in 2021, but because the SECURE Act does not require an employer to start ‘counting’ a 500-hour year as a 500-hour year for the purposes of this new rule until 2021. Thus, the earliest an employee would be eligible to participate in a 401(k) plan as a result of this change will be in 2024.

Additional Miscellaneous Retirement Provisions of the SECURE Act

In addition to the headline-grabbing retirement changes, the SECURE Act also makes a number of smaller changes to retirement planning that advisors should be aware of, including:

· Taxable Non-Tuition Fellowship And Stipend Payments Treated As Compensation For IRA Purposes – Beginning in 2020, individuals who have taxable stipends or other amounts paid to them to aid in the pursuit of a graduate or postdoctoral study can use those amounts as compensation for IRA/Roth IRA contribution purposes.

· More Retirement Plans Can Be Adopted After Year-End – Under current law, if an employer wants to establish a qualified retirement plan for the year, they must generally do so by December 31st of that year (or the last day of the employer’s fiscal year). Beginning in 2020, employers may adopt plans that are entirely employer-funded, such as stock bonus plans, pension plans, profit sharing plans, and qualified annuity plans, up to the due date (including extensions) of the employer’s return.

Kiddie-Tax Reverts To Pre-Tax Cuts And Jobs Act Rules

A notable non-retirement provision attached to the SECURE Act includes a repeal of the TCJA-introduced Kiddie Tax changes. Just two years ago, the Tax Cuts and Jobs Act changed the nature of the so-called Kiddie Tax, a tax on the unearned income of certain children. Prior to the TCJA, any income subject to the Kiddie Tax was taxable at the child’s parents’ marginal tax rate. By contrast, the TCJA made that income subject to trust tax rates.

For those children with more modest unearned income this often resulted in modest tax savings. But for those children with more significant unearned income, the compressed trust tax brackets typically led to a much higher tax bill.

The change is effective for 2020, with an additional kicker. Taxpayers can elect to apply the old rules to the current 2019 tax year, and back to 2018 as well! As such, if your children had substantial unearned income in 2019 you can simply choose to use the new rules (unless the ‘old’ rules at trust tax rates actually were more favorable as in the case of extremely affluent parents).

Tax Extenders Bill Revives Dead Tax Breaks

Congress has once again come through at the last minute to extend certain tax breaks in what is being called the “Taxpayer Certainty and Disaster Relief Act of 2019”.

The following tax benefits for individuals are reinstated retroactively to 2018, and made effective only through 2020:

· The exclusion from gross income for the discharge of certain qualified principal residence indebtedness;

· Mortgage insurance premium deduction; and

· Deduction for qualified tuition and related expenses.

Additionally, the AGI ‘hurdle rate’ that must be exceeded to deduct qualified medical expenses remains at 7.5% of AGI for 2019 and 2020 (it was already lowered to 7.5% for 2018 by the Tax Cuts and Jobs Act), lowered from the previous rate of 10% of AGI in 2017.

Life Expectancy Table

Unrelated to this bill, but a recent development worth including here, beginning in 2021 the IRS is changing its life expectancy table for the calculation of RMDs. To use just two examples, previously an 80-year-old using the standard table would have used a life expectancy of 18.7 years but in 2021 it will be 20.2. A 90-year-old will change from 11.4 to 12.2. This means the required distribution will decrease from 5.35% to 4.95% at 80 and 8.77% to 8.20% at 90. Not a huge change, but a good one.


The SECURE Act’s full impact won’t be felt for decades, but the time to act is now, even if it’s just a review to make sure nothing’s changing for you. Don’t delay and fall into higher taxes because you weren’t proactive around the new retirement law changes.

If your estate planning documents leave your retirement account to a trust for the benefit of your heirs, we should re-evaluate that decision. And if your taxable (i.e. non-Roth, non-basis) retirement plan balances are likely to be high enough that withdrawing one-tenth each year for the ten-year deferral period would be enough to place your heirs into a higher income tax bracket than you are currently in, then Roth conversions for their benefit may be prudent.

Because so many of these changes are complex and involve long-term financial and tax planning strategies, it is important to consider how the act will impact your overall plan, so consider scheduling a meeting with us now.

This newsletter is published by Davis & Hodgdon as a service to our clients, business associates and friends.  Recipients should not act on the information presented without seeking prior professional advice.  Additional guidance may be obtained by contacting Davis & Hodgdon at 802-878-1963 (Williston) or 802.775.7132 (Rutland).

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