The SECURE Act of 2020
In late December Congress passed and the President signed, we aren’t kidding – this is the real name of this legislation, the Setting Every Community Up for Retirement Enhancement (SECURE) Act – this legislation is now the law of the land. Where DC came up with the name is a mystery, but some of the major provision of the law are summarized below.
- The legislation changes the rule for people who inherit an IRA or other retirement vehicle such as a 401(k) plan. Previous to the enactment of the SECURE Act inheritors of IRAs/401(k) plans/Roth IRAs were required to take out distribution over their lifetime, which allowed the accounts to continue to grow tax free; now the inherited IRA must be distributed, in full, by the end of the tenth year after it is received. All income taxes would be due at the time of the distribution, except for Roth IRAs for which distributions would still be tax-free. There are four groups of designated beneficiaries that will not be impacted by the 10-Year Rule. These are: spousal beneficiaries, disabled beneficiaries, individuals who are not more than 10 years younger than the decedent, and minor children of the original account owner until they reach the age of majority. These groups can still take the funds out over their lifetime, except the minor children who can stretch the withdrawals until they reach the age of majority, 21 in most states, then the funds come out over ten years.
- People who are working beyond age 70 1/2 can now make IRA contributions, they already could keep contributing to Roth IRAs and 401(k) plans, so not really a significant change.
- The date when people were required to start taking distributions out of their IRAs (called required minimum distributions, or RMDs) was pushed out until age 72; the previous start date for RMDs was age 70 1/2. Basically, retirees are being given an extra year and a half of compounding returns before they have to take money out (and pay taxes on it) whether they need it or not.
- Would be parents will be able to withdraw $5,000 penalty free from their retirement accounts to cover the cost of the birth or adoption of a child.
- Small businesses will find able to group together and offer a 401(k) or other plans together, rather than individually which will potentially reduce the financial barrier to creating a plan for employees, and lower the fees associated with 401(k) plans for small businesses. And a small business that sets up its first 401(k) plan will receive a $5,000 credit for doing so.
- Employers will be able to automatically increase their employees’ 401(k) contributions up to 15% of their pay, up from 10% currently.
- Finally, the new law creates a safe harbor for employers to offer annuities as an investment vehicle. This may provide an opportunity for employees to use the annuities to create a guaranteed income stream in retirement, but buyer beware, many annuities come with high expenses.
If you have questions concerning elements of the SECURE Act please contact us at for answers and insight into how this law may impact your financial or estate plan.