The act is SECURE – is your retirement?

The second substantive financial legislation of Donald Trump’s presidency is now law. The SECURE Act – named the Setting Every Community Up for Retirement Enhancement Act by someone who needed to put the acronym cart before the nomenclature horse – was signed by the president in December 2019.

As you recall, Mr. Trump’s signature accomplishment on Capitol Hill was the passing of 2017’s Tax Cuts and Jobs Act. By all accounts, the tax reform law turned out to be a boon to business, but of little immediate benefit to most individual taxpayers.

Will the bipartisan SECURE Act, then, have a more direct impact – and, if so, will it be a positive one?

Security blanket statements

“Like grave robbers opening King Tut’s tomb, Congress can’t wait to get its hands on America’s retirement-account assets,” psychologist-turned-wealth-manager Philip DeMuth frothed in a July op-ed which ran in the Wall Street Journal. Before the SECURE Act’s passage, “A parent could die with the knowledge that, whatever vicissitudes their children might experience in life, they won’t have to worry about retirement. Congress wants to kill this.”

(Fact check: King Tut’s tomb was robbed twice, both times shortly after the pharaoh’s death 33 centuries ago. Evidence collected since its 1922 rediscovery suggests the thieves didn’t get away with much. Also, most of the 417 members of Congress and 71 senators who voted for the bill are parents and presumably love their children too.)

Somewhere between his ad hominem fallacies and hysterical tone, DeMuth has a point. It’s about the new treatment of the stretch IRA, which he calls “the fixed star in the financial-planning firmament since 1999.”

Previously, non-spouse beneficiaries could spread disbursements from the inherited IRA over their lifetimes. The SECURE Act, though, requires disbursements to be collected and taxed within 10 years of the original account holder’s passing. Because the money can’t grow tax-free after that period and disbursements would be considered taxable income, the new treatment of stretch IRAs is projected to raise $15.7 billion in revenue.

What $15.7 billion buys

That’s the anticipated cost of the SECURE Act’s other provisions, which include raising the age at which defined-contribution plan participants must take their minimum required distributions. Until this year, participants had to make their first withdrawal prior to turning 70.5 years old. They can now wait until age 72 to take that first distribution. To clarify: If you want to take it at 70.5 – or earlier – you still can under the SECURE Act. Traditional IRA participants are also empowered to continue contributing even after turning 70.5, which had been the cutoff.

Other provisions include:

  • Graduate students can treat stipends and non-tuition fellowship payments as compensation for IRAs contribution purposes.
  • Parents can withdraw up to $5,000 from retirement savings plans for each new child without incurring the 10% penalty for taking an early distribution.
  • Employees who purchase an annuity in their 401(k) can move it to another 401(k) plan at a different employer or to an IRA penalty-free. Other provisions make it easier for plan sponsors to offer annuities.
  • Unrelated small businesses can establish a shared 401(k) plan, mitigating administrative costs. 

Securing victory

AARP endorsed the SECURE Act, along with the Society for Human Resource Management and several – by no means all – financial advisory firms.

The main opposition to it focuses on two things. The first, obviously, is the constraints on stretch IRAs. The other is that the SECURE Act has the effect of promoting annuities, which might not be the wisest choice for all plan participants.

Other pushback comes from the “safe harbor” provisions that make it difficult to sue a 401(k) sponsor if the provider goes out of business.

Like anything else, there is good and bad in the SECURE Act’s provisions and we, frankly, are skeptical of the benefits. That said, it is now the law. It won’t affect your 2019 taxes, but it could well have a serious impact in 2020 and going forward. That’s especially true if the 2017 tax reform act isn’t renewed in 2025. You might want to get ahead of this and contact a professional financial advisor.