Inside Changes Coming to the Secure Act

Ben Ronning Commentary

Inside Changes Coming to the Secure Act

The original goal of the Setting Every Community Up for Retirement Enhancement (Secure) Act was to promote retirement savings, because many people don’t have enough savings to fully retire at age 65. 

Approved by Congress and signed by President Donald Trump in 2019, the law is likely to undergo important changes by the end of the year. Here’s a look at what lawmakers might consider for Secure Act 2.0, which would take effect in 2023:

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Changes to the Required Minimum Distribution

RMD is the amount of money that must be withdrawn from an employer-sponsored retirement plan, traditional IRA, Simplified Employee Pension (SEP) or Savings Incentive Match Plan for Employees (Simple) IRA by owners and qualified retirement plan participants of retirement age. 

The original law raised the age of required minimum distributions to 72 and eliminated the maximum age limit for making traditional IRA contributions. The law also eliminated the “stretch” IRA for most non-spouse beneficiaries, meaning these beneficiaries had to take distributions over 10 years instead of taking RMDs over the decedent’s projected mortality.

Under Secure Act 2.0:

 The RMD age would rise to 73 in 2023, 74 in 2030 and 75 in 2033, an acknowledgment of retirees’ longevity and an effort to make sure they have maximum flexibility to navigate their savings through a longer retirement. This would provide more choice as to when to take your RMDs.

 An excise tax for not taking your RMD from a retirement account in a timely manner would decrease from 50% to 25% (and in some cases to as low as 10%).

 Employers would be required to automatically enroll eligible workers into the firm’s 401(k) or 403(b) plans at a savings rate of 3% of salary, with contribution rates automatically increasing each year by 1% until their contribution reaches 10%. “Catch-up” contributions — those above annual retirement plan limits for ages 50-plus — would increase for workers at ages 62, 63 or 64. This would provide more opportunity to save at those specific ages.

Changes to Post-Death Distribution Rules

These proposals could affect retirement accounts beneficiaries and how they are defined. 

There are two classes of beneficiaries within designated beneficiaries or “living beneficiaries” of retirement accounts: Eligible Designated Beneficiaries (EDB) and Noneligible Designated Beneficiaries (NEDB). EDBs are essentially first-class beneficiaries, and they can stretch IRA distributions like the Secure Act never existed. This group includes surviving spouses, disabled beneficiaries, persons not more than 10 years younger than the deceased IRA owner, and minor children of the deceased. NEDBs are basically everyone else living.

Under Secure Act 2.0 a minor of the deceased could be age 21 or the age of majority in the state where you reside. Under the current rule, a minor of the deceased can be as old as 26 if they are pursuing a higher education. The change means beneficiaries must be aware of whether they are an EDB or a NEDB, and whether they can stretch IRA distributions or must receive payouts under the “10-year rule.”

Because if one is deemed a NEDB, when one inherits the IRA matters. If you inherit before the required beginning date (RBD) or date the decedent is required to begin taking RMDs, then you can take distributions over 10 years and plan around those projected distributions. But if one is deemed a NEDB and inherited on or after the decedent’s RBD, then the 10-year rule would apply, and the “stretch” requirement would be layered on top of the other.

This is just a sampling of the changes that affect a range of clients. Your financial adviser can ensure that these changes are accounted for within your overall financial plan.

Ben Ronning, based in Lowell, is director of financial planning and practice management at Arvest Wealth Management.