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Do You Feel SECURE? (Johnny Brown Commentary)

3 min read

The financial industry is adjusting to a new federal law that is not yet widely known by retirement plan investors and sponsors but could have serious implications for their retirement plans. The SECURE Act of 2019 — that stands for Setting Every Community Up for Retirement Enhancement — originated as HR 1994, passing in the U.S. House of Representatives in May and in the Senate on Dec. 19 as part of the fiscal year 2020 appropriations bill. It was signed into law by President Donald Trump on Dec. 20.

It contains changes with both positive and negative implications for investors and retirement plan sponsors. Let’s explore these key takeaways of what the SECURE Act does:

  • Increases the age of required minimum distributions from retirement accounts from 70½ to 72;
  • Repeals the maximum age of contributing to a traditional individual retirement accounts, currently 70½;
  • Eliminates the “stretch” IRA for non-spouse heirs and imposes a 10-year rule for distributions;
  • Allows long-term part-time workers to participate in 401(k) plans;
  • Provides “safe harbor” for plan sponsors to include annuity income options in defined contribution plans;
  • Allows parents to use up to $5,000 of retirement funds for birth or adoption expenses within a year of birth or adoption; and
  • Allows parents to use 529 funds of up to $10,000 for student loan repayments.

The SECURE Act’s most noticeable change to most people may be the raising of the required minimum distribution age to 72. Since people are living and often working longer, many don’t need to pull money from their IRA at age 70½. This change will allow retirees to better guard against running out of money in retirement, keeping that money invested to grow tax-deferred for a couple more years. (This does not affect people who turned 70½ before Jan. 1, 2020, and were already required to take RMDs.) Additionally, in the spirit of allowing more savings into retirement plans, the act repeals the 70½ age limit on traditional IRA contributions, allowing deposits up to the annual maximum, currently $7,000 for investors over 50, as long as the saver has earned income of at least the contribution amount.

The change likely to be the most detrimental to investors is the disallowance of the “stretch IRA.” In the past, if a retirement plan was inherited by someone other than the decedent’s spouse, the heirs could stretch required minimum distributions out over their expected lifetimes and minimize the taxes owed.

The SECURE Act requires those heirs to take the full distribution over 10 years, which can bump them into higher tax brackets and result in much higher tax payments — especially since most people inheriting funds from their parents are in the highest earning age range of their lifetime. There are exceptions to this rule, such as being a spouse, a minor child or someone less than 10 years younger than the decedent. Careful financial planning will be necessary to help with this problem created by the new law.

The SECURE act affects employers a couple of ways. First, it simplifies small businesses’ ability to pool their resources and participate in multiemployer plans. This could ease the startup costs and annual administrative burden on small businesses. Second, employees working more than 500 hours for three consecutive years, starting in 2021, will be allowed to participate in 401(k) plans. Previously, the eligibility requirement was 1,000 hours over one year. While this may require some employers to add participants, and increase costs, it will not affect anyone until the 2024 plan year, since the clock starts after Dec. 31, 2020, for this change.

A new Safe Harbor option for adding annuities to retirement plans is a boon for insurance companies that sell annuities and could help the most conservative investors guarantee their income for life. But given the complexities and high fees often associated with annuities, this option could open the door to poor outcomes for investors who don’t actually need the products and don’t understand what they are buying.

Although the jury is still out on whether the SECURE Act overall helps or hurts retirement plan participants, one thing is certain — it adds complexity and potential pitfalls. Consequently, we highly encourage talking to your financial adviser about what the impact of the SECURE Act is on your specific situation.


Johnny Brown is president and CEO of Brown Capital Management LLC, an independent, registered investment advisory firm in Little Rock. Email him at JBrown@Brown-CM.com.

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