Breaking News - SECURE Act Approved

Mark Hume and Harold Sasnowitz |

The House and the Senate have passed, and the President is expected to sign the SECURE Act. This piece of legislation creates some substantial shifts in laws governing certain retirement accounts. The House and Senate had different versions of this Act and we await their final decisions. We will cover the very basic, high level view of these changes while we await review of the actual legislation signed. One reason to break this news is the fact that this law is being signed less than two weeks before the end of the year and the changes take place on January 1st. We are going to hit some of the high points in this Act, but bear in mind this is a legal document built by hundreds of politicians who want to be re-elected by their thousands of respective constituents; so this Act is far more complex than this blog post or anything any normal person wants to read. Let’s hit those points:

  • RMD AGE EXTENDED: To this point RMD’s have been determined by a somewhat confusing rule of “in the year following the year you turn 70 ½”. This requires you to think a little more than you should about a tax law that will penalize you 50% if you don’t follow it. Now, RMD’s from your tax-deferred retirement accounts must begin at age 72 (though the Senate’s version of the bill is pushing for 75). This change will affect many people and it is important to discuss this change with your advisor and/or tax professional if you turned 70 or 71 this year.
  • CONTRIBUTIONS TO IRA’S ALLOWED LONGER: Currently, you cannot contribute to an IRA if you are beyond 70 ½ even if you are working. This bill is reported to eliminate that rule except for a few specific people like business owners with a >= 5% ownership stake.
  • INHERITED IRA’S MUST BE LIQUIDATED QUICKER: If you Inherited an IRA, you may have to liquidate it within 10 years of when you inherit it. Previously you could stretch it out over the life expectancy of either yourself or the original owner. Early reports suggest this does not apply to inherited IRA’s received before January 1, 2020. Also, important (and yet confirmed with certainty as of this writing), if you are a spouse, minor child, disabled, chronically ill, or within 10 years of the original owner, you don’t have to follow this change. This is a revenue generator for the federal government as it forces the recognition of income from these accounts quicker and at greater levels that could cause it to come out in higher tax brackets. The Senate’s version of this provision would not require liquidation unless the account exceeded $450k. This provision of the Act benefits one of my favorite planning techniques, partial Roth conversions, to help reduce the tax burden for those that are certain to inherit retirement accounts.
  • 401(K) ACCESSIBILITY INCREASED: If executed with quality and integrity, this could easily be one of the more positively impactful provisions of the bill for the everyday US citizen. 401(k)’s for small business owners have historically had a difficult barrier to entry: They are too expensive for many business owners early in their existence. Provisions in this act are designed to offer incentives to the business owners in the form of tax credits that would offset much or all the cost of implementing a new plan. This is a great opportunity to provide retirement savings opportunities to thousands of employees of small businesses across the nation. Politicians deserve applause on this specific provision.
  • ANNUITY OPTIONS IN 401(K)’S INCREASED: In a move clearly influenced by the insurance lobbyists, annuity options will be more frequent inside 401(k) accounts along with annual disclosures touting the annual guaranteed income a 401(k) can generate. PROCEED WITH CAUTION! While the right annuity can make sense for specific people in specific situations, it is not a blanket recommendation for all and the majority of the products that we expect to see as a result of this legislation will be stricken with profitable incentives for the insurance companies and the sales representatives that will push them.

While there are many more provisions proposed in this plan, these are the major provisions with the most impact. It is also important to reinforce that there was a House bill and a Senate bill, and they were not identical. The final results are not yet known but I generally perceive this bill to have the potential to have a net positive effect on the middle class of this country. And that is something that should make you smile.

- Mark Hume and Harold Sasnowitz -