The Setting Every Community Up for Retirement Enhancement (SECURE) Act is bipartisan retirement legislation that was signed into law on December 20, 2019 and is effective January 1, 2020. The SECURE ACT represents the most significant legislative change to the United States retirement system in over a decade and the provisions discussed below could impact many retirees.
Individual Retirement Account (IRA) related provisions
Required Minimum Distribution (RMD) age increasing to 72
The age 70½ trigger for taking a RMD is raised to age 72 for individuals who attain age 70½ after 2019. Under the effective date, an individual who attains age 70½ in 2019 will need to take RMDs for 2019 and 2020, even though he or she may not attain age 72 until 2021. However, an individual who turns age 70 ½ in 2020 will not be required to take an RMD until he or she turns age 72, which could be in 2021 or as late as 2022.
Stretch IRA restrictions
The Act provides that, upon the death of an IRA owner or defined contribution plan participant, the designated beneficiary is required to draw down his or her entire inherited interest within 10 years. The 10-year rule does not apply to any portion payable to a surviving spouse, who would be allowed to “stretch” the post-death distributions over life or a period not exceeding their life expectancy. There are also different rules for minors and disabled beneficiaries. These restrictions apply to deaths after 2019.
Post-70 1/2 contributions to traditional IRAs
The Act repeals the current prohibition on contributions to traditional IRAs after the owner attains age 70½ as long as the owner has earned income in excess of the contribution amount. This change is effective for taxable years beginning after 2019. The age restriction will still apply to 2019 tax year contributions made on or before April 15, 2020, but not to 2020 tax year contributions.
Penalty-free distributions upon the birth or adoption of a child
The Act permits a defined contribution plan participant or IRA owner to withdraw up to $5,000 tax penalty-free upon the birth or adoption of a child for distributions after 2019. This provision adds to an existing list of penalty-free distributions already allowed.
Other provision of interest
Safe harbor for annuity provider selections
Effective immediately, the Act adds a statutory safe harbor to ERISA for the selection of annuity providers that (a) allows defined contribution plan fiduciaries to rely on written representations from insurers regarding their status under state insurance law for purposes of considering the insurers’ financial capabilities, (b) specifies that a fiduciary is not required to select the lowest cost contract but may also consider the value provided by other features and benefits and attributes of the insurer, (c) clarifies that fiduciaries are not required to review the appropriateness of a selection after the purchase of a contract for a participant or beneficiary, and (d) in general, deems fiduciaries to have conducted a periodic review if the fiduciary obtains certain written representations from the insurer on an annual basis.
Portability of lifetime income investments
For plan years after 2019, the Act allows qualified plan participants to take a distribution of a “lifetime income investment” without regard to the restrictions on plan withdrawals prior to a “distributable event.” The distribution would be allowed only if (a) the lifetime income investment is no longer authorized to be held under the plan, and (b) the distribution is made via (i) a direct rollover to an IRA or other retirement plan, or (ii) a distribution of an annuity contract. This change is intended to encourage employers to offer lifetime income options within their plans, including annuities with guaranteed lifetime withdrawals.
Lifetime income illustrations
The Act requires defined contribution plan benefit statements to include an annual lifetime income disclosure. The disclosure is required to set forth the projected monthly lifetime income stream equivalent of the participant’s total account balance under the plan in the form of both a qualified joint and survivor annuity and a single life annuity. This provision is effective for benefit statements furnished more than one year after certain required Department of Labor guidance is issued.
If you have questions or would like to see if the SECURE Act affects your retirement, please contact us here at South Coast.
Click here to read the bill in full.