The SECURE Act: Things You Need To Know Right Now

Matthew J. Abraham, Esq.

The ‘Setting Every Community Up for Retirement Enhancement’ (SECURE) Act of 2019 was passed and is now in effect. Because this bill was the product of actual bipartisan effort, it should give thinking Americans a major understanding of just how important this issue really is. I mean, if the two sides of the political aisle are working together (the House voted 417 to 3!!), it certainly must be that important!

One thing is abundantly clear: The current rules were not allowing nearly enough Americans to put away the nest egg they’ll ultimately need for a secure retirement. The average American needs help to prepare for their golden years. Our fathers’ generation would never have believed that pension systems might fail or that Social Security may not be available for them. The burden is on individuals to look ahead and make their own plans to finance their retirement.

This far-reaching bill includes significant provisions aimed at increasing access to tax-advantaged accounts and preventing older Americans from outliving their assets.

SECURE contains 29 separate provisions, but there are a few major provisions that are relevant, timely, and likely to change the way we navigate our financial and estate planning.

Some of the advantages of the Act will do the following:
• Make it easier for small businesses to set up 401(k)s by increasing the cap under which they can automatically enroll workers in “safe harbor” retirement plans, from 10% of wages to 15%.
• Provide a maximum tax credit of $500 per year to employers who create a 401(k) or SIMPLE IRA plan with automatic enrollment.
• Enable businesses to sign up part-time employees who work either 1,000 hours throughout the year or have three consecutive years with 500 hours of service.
• Encourage plan sponsors to include annuities as an option in workplace plans by reducing their liability if the insurer cannot meet its financial obligations.
• Push back the age at which retirement plan participants need to take required minimum distributions (RMDs), from 70½ to 72, for those who are not 70½ by the end of 2019.
• Allow the use of tax-advantaged 529 accounts for qualified student loan repayments (up to $10,000 annually).
• Permit penalty-free withdrawals of $5,000 from 401(k) accounts to defray the costs of having or adopting a child.
• Encourage employers to include more annuities in 401(k) plans by removing their fear of legal liability if the annuity provider fails to provide and also not requiring them to choose the lowest-cost plan. (This could be something of a double-edged sword. Employees will need to look extra-carefully as these options.)

There are also, however, some significant disadvantages that also come into play:

In most instances, SECURE eliminates the ‘Stretch’ IRA which has allowed non-spouses inheriting retirement accounts to stretch out disbursements over their lifetimes. The Act now mandates that inherited IRAs with non-spouse beneficiaries (kids or grandkids) will require a full payout from the inherited IRA within 10 years of the death of the original account holder. Before SECURE, the stretch IRA would allow a spouse to leave their IRA to their surviving spouse, who would roll over the deceased spouse’s IRA into theirs, producing a larger combined IRA account. Then, when the last spouse dies, they could leave the balance to the couple’s children or grandchildren who could take the IRA’s distribution over their full anticipated life expectancies, in effect ‘stretching’ the IRA. This significantly minimized the impact of the income tax obligation of the beneficiary on that savings, providing stable streams of income that did not move them into a much higher tax bracket. These rules, with a few narrow exceptions, are now gone. Because the balance of inherited IRAs must now be disbursed within 10 years of the death of the second spouse, this will cause much larger distributions during peak earning years, which will have a significant impact on the tax obligation. This change alone has the potential to raise an estimated $15.7 billion in additional tax revenue in the first decade.

So who does this affect? The short answer is: A whole lot of people.

First, realize this affects all qualified plans, so §401(k), 403(b), 457(b), 401(a), ESOPs, Cash Balance plans, lump sums from defined benefit plans and IRAs, which are the recipient vehicles of most of those plans as rollovers. Just how big is this impact?  In 2017, the total assets of traditional IRAs topped 7.85 trillion. So, it means that a thorough review of your financial and estate plans should be considered.

This is time for a conversation. Estate and financial planning professionals can assist with planning for retirement and inheritance, taking into consideration pre-tax vs. post-tax contributions and considerations. There will likely be a lot more discussion had about Roth IRAs and conversions and considerable thinking about putting your estate plan in place or revising your current estate plan. There has never been a more important time to talk to your financial and legal professionals. It is urgent to explore your options and alternative methods for estate planning and retirement savings.

Abraham | Law:  Experienced and Exceptional Estate Planning Representation

You’ve invested a lifetime in working hard, building your business, and saving for the future.  Estate planning is essential to preserve your hard-earned business, assets, and your legacy.  Having an experienced Michigan Estate Planning Attorney to protect your interests is important.  Matthew Abraham of Abraham | Law will assist you through the intricate process of thoroughly preparing a complete estate plan tailored to meet your specific needs and wishes.  With the myriad of estate planning tools available to you, you need an estate planning law firm that will guide you in the best direction for your family.  

For assistance with all of your estate planning needs, call Abraham | Law today at (810) 750-0440 to schedule your free consultation.  

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