On December 20th, President Trump signed into law the SECURE Act, the most comprehensive retirement reform package in a decade with wide-ranging impacts for both individuals and employer-sponsored retirement plans.
The most impactful provisions are summarized below:
1. The age in which an individual must begin taking Required Minimum Distributions (RMDs) from retirement accounts has increased from age 70 ½ to age 72. This is effective for anyone who attains age 70 ½ after December 31, 2019.
2. The ability to “stretch” inherited retirement plan balances (IRA, 401k, 403b, etc.) over the lifetime of non-spousal beneficiaries is no longer permitted. Anyone inheriting a retirement account from a non-spouse individual whose date of death is after December 31, 2019 will be generally required to distribute all assets from the account (and pay applicable income taxes) by the end of the 10th calendar year following the year of the original account holder’s death. An exception to this new rule will still apply to spousal beneficiaries and a few other limited situations.
The passage of this provision may further enhance the value of making Roth (after-tax) contributions for those that expect to leave some assets to their heirs, since these types of account are generally not taxable to beneficiaries.
3. Allowable expenses for 529 college savings plans have expanded to include apprenticeships and up to $10,000 of qualified education loan repayments. This is effective for distributions in 2019 and later.
4. Safe harbor plans utilizing a Qualified Automatic Contribution Arrangement (QACA) may now set the cap of their auto-increase program to a maximum of 15%, up from 10%. With most financial advisors recommending a 12-15% long-term savings rate, this will aim to help passive savers improve their retirement outcomes.
5. Plan participants are now required to receive, at least annually, a disclosure containing a projected lifetime income stream that their account could generate. This could improve the decision making of participants by focusing their attention away from their total account value and toward a more meaningful estimated retirement income value instead.
6. Unrelated employers will now be able to work together to establish “pooled employer plans”, or PEPs, to create additional economies of scale and lessen the administrative and financial burden of plan sponsorship. This will be especially advantageous to smaller employers who have previously been unable to, or wary of, sponsoring their own retirement plan.
You can read more about the SECURE Act and all of its provisions by clicking here for individuals or here for employer-sponsored retirement plans. Additional details are sure to follow in 2020 as the IRS and DOL digest these new laws, and we will continue to provide more information as this develops!