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The SECURE Act: Expanding Access to Tax‑Qualified Savings

John Nersesian discusses key provisions of the most consequential retirement legislation in more than a decade.

Enactment of the SECURE Act last month has been acclaimed as the most significant legislation to raise Americans’ retirement preparedness since the Pension Protection Act of 2006. But the reform also has raised numerous questions from financial advisors. In the following Q&A, John Nersesian, head of PIMCO’s advisor education team, responds to the most frequently asked questions.

Q: What is the SECURE Act?

A: The Setting Every Community Up for Retirement Enhancement Act of 2019 – better known as the SECURE Act – was signed into law on 20 December 2019. Its far-reaching provisions seek to expand access to tax-qualified retirement accounts and reduce the risk that retirees will run out of money.

Q: What are some key provisions of the SECURE Act?

A: Among the most consequential provisions is repeal of the maximum age limit for traditional IRA contributions. Individuals may now continue to contribute at any age so long as they are still actively working. Previously, contributions could not be made after the age of 70½. Note, however, that contributions to IRAs are only allowed from current-year earnings.

The Act also raises the age for required minimum distributions (RMDs). Previously, RMDs began in the year the account owner turned 70½. The Act increases this to 72, though the new requirement only affects those who hadn’t reached 70½ by 31 December 2019. All qualified retirement accounts, including 401(k)s, pensions and traditional IRA accounts, continue to be subject to RMDs.

Another key provision expands access to 401(k)s to part-time workers. Previously, employers could exclude part-time workers from participating. Now, all long-term, part-time workers (defined as individuals who work more than 1,000 hours in one year or a minimum of 500 hours over three consecutive years) are eligible to participate in their company’s 401(k) plan.

The Act also facilitates increased use of annuities inside 401(k)s. It does so by reducing a plan sponsor’s fiduciary risks with these products under ERISA. Increasing annuity usage may help to provide access to guaranteed lifetime income products to future retirees. It will also permit trustee-to-trustee transfer of these vehicles to preserve lifetime income benefits and avoid potential surrender charges.

Q: How does the SECURE Act affect small businesses?

A: The Act makes it easier for small businesses to band together to offer 401(k) plans to their workers, and provides tax credits to incentivize these firms to implement automatic enrollment features. These credits apply for up to three years and are limited to the greater of $500 or the lesser of  $250 per eligible non-highly compensated employees, or $5,000.

Q: Are there setbacks based on the elimination of stretch IRAs?

A: Perhaps. Under the SECURE Act, spouses may continue to take distributions from inherited IRAs over the life expectancy of the original account owner or their own life expectancy. However, non-spouse beneficiaries are now required to distribute all inherited account assets, including Roth IRAs, by the end of the 10th year following the original account owner’s death. Exceptions include the account owner’s spouse, disabled individuals, those who are not more than 10 years younger than the IRA owner, and minor children.

There are a number of important implications:

  • The tax-advantaged compounding period traditionally afforded to inherited retirement account assets is shortened. This limits future account balances available to fund prospective retirement expenses for beneficiaries.
  • There also is a new 10-year window: Assets must be removed within 10 years without a specific distribution schedule. This gives beneficiaries the flexibility to time their largest distributions during lower-income years.

However, because of the compressed distribution period, required distributions may be larger than before, increasing the beneficiary’s taxable income. This will potentially subject RMDs to a higher marginal tax rate. (Note that retirement account distributions are generally subject to a maximum ordinary income tax rate of 37.0%, but are exempt from both the net investment income tax of 3.8% and the Medicare tax of 0.9% levied on taxpayers with income in excess of $250,000.)

In addition, conduit trusts, a tool often used for asset protection and RMD planning, now face a situation in which there is no RMD in years one though nine, but have a required lump-sum distribution in year 10. This could create unintended cash flow limitations and a significant tax burden in certain years.

Q: What planning opportunities should financial advisors consider?

A: Advisors may want to help clients model their future RMDs to better understand the impact on their retirement income needs and the associated income tax implications of these distributions. They also may wish to remind investors to review their beneficiary designations – particularly individuals who had named younger children as potential beneficiaries of an elongated distribution period.

Finally, advisors may want to evaluate the choice of whether to contribute to traditional retirement savings vehicles, including IRAs and 401(k)s, or a Roth IRA, where available. While traditional accounts provide a current benefit of reducing taxable income in the year of contribution, Roth accounts provide tax-free distributions later in retirement.

1 Subject to applicable contribution and deduction limits

The Author

John Nersesian

Head of Advisor Education

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