SECURE Act revisited Pt. 2 - Plan Participants

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law on December 20, 2019. It was the most sweeping change to the retirement industry passage of the Pension Protection Act (PPA) in 2006. Most of the provisions took effect almost immediately on January 1, 2020, leaving plan sponsors scrambling to implement them, while a few others weren’t effective until a year later.

The SECURE Act provides more access to retirement plans for more people, allows participants more options in retirement, and provides small businesses with incentives to offer and additional options to establish new 401(k) plans. With all the provisions now effective, here’s what Plan Participants need to know:

  • Required Minimum Distributions (RMDs) begin at age 72
  • Elimination of the “Stretch” IRA
  • Penalty-free adoption/birth withdrawals
  • Lifetime income strategies inside 401(k) plans
  • Lifetime income disclosure rule

Required Minimum Distributions (RMDs) begin at age 72

Americans are living longer on average now than they did in the last century which means it was about time the age for RMDs was revisited! Beginning in 2021, individuals can now wait until the April 1st after they’re 72 (instead of 70 ½) or retire to start taking RMDs from their 401(k) plans and IRAs. That will give those born after June 30, 1949, an additional year-and-a-half to plan how they would like to receive their retirement income.

The CARES Act (another story, entirely, which is discussed in part in another blog of ours: Coronavirus Distributions - Info for Plan Participants and Sponsors), passed in March 2020 which affected SECURE provisions related to RMDs by suspending them for participants in 2020 and provided special guidelines for those who had already taken them. RMDs have returned in 2021 under the new age 72 rule.

Elimination of the “Stretch” IRA

As is the case with most legislation, it can’t be all roses and chocolate- you also have to pay the delivery person. The SECURE Act eliminated a wealth-management tool widely used by all kinds of people to delay the taxation of deferred accounts, the Stretch IRA.

Briefly, the Stretch IRA is nothing special; it’s simply the concept of passing a regular, old IRA from a deceased relative to a younger beneficiary. The significant shift here, though, is that the result of this transfer of wealth no longer indefinitely delays the requirement that a minimum amount is taken out as taxable income each year based on the account owner’s age. Of course, the potential for the beneficiary to be too young to need an RMD is large, so this prevents the government from collecting their taxes which was the agreement from the beginning when originally designing these tax-deferred programs. Now, inherited IRAs must be fully distributed (i.e., taxed) within ten years of the death of the original owner. That’s a big deal.

Penalty-free adoption/birth withdrawals

Perhaps a great candidate for “Why Didn’t We Think of this Before,” SECURE now allows for penalty-free withdrawals from 401(k) plans for expenses related to the birth or adoption of a child of up to $5,000 per parent. That means parents could potentially withdraw $10,000 from their retirement plans (as long as the plans are separate) without having to pay the 10% early withdrawal penalty if they’re under age 59 ½. An added benefit – they can later repay the withdrawn amounts as a rollover into their 401(k) plan or an IRA.

Lifetime income strategies inside 401(k) plans

401(k) plans can offer investments such as index and target-date mutual funds, managed accounts for access to individual stocks and bonds, or, while increasingly rarely, annuities. Annuities have long caused concern by affected Employers about lawsuits and their responsibilities for oversight should the annuity provider have problems down the road.

Fortunately, SECURE has made it easier for 401(k) plan sponsors to have annuities as an option by offering a safe harbor that will protect employers who offer in-plan annuities. SECURE also makes in-plan annuities more portable for employees by letting them move their annuity to another 401(k) plan or IRA without having to pay surrender charges or other fees if they leave their current company or retire.

Lifetime income disclosure rule

SECURE requires 401(k) plan sponsors to provide an estimated lifetime income disclosure on participant statements at least once a year. The disclosure would show an estimated amount you could receive if your 401(k) balance was used to purchase an annuity. The disclosure is also to include an explanation of the assumptions (not yet finalized) used to produce the illustrated amount. Special assumptions will be used if a plan offers an in-plan annuity option.