The 2019 SECURE Act: Give a Little, Take a Little More

On December 20, 2019, President Trump signed the 715-page Further Consolidated Appropriations Act, which included a clever combination of words to produce the “Setting Every Community Up for Retirement Enhancement” Act or better known for its acronym, the SECURE Act.

The goal of this bill was to expand opportunities for individuals ranging from graduate students to professional part-timers to the older generation that is not ready to retire. It also made modifications to administrative rules to “simplify” the retirement system. These would be the “gives” of the bill. The most notable change is the “take”, which is the elimination of the “stretch provision” for most non-spouse beneficiaries of qualified retirement accounts. This article will go over the key components of this bill that will affect both individuals and businesses in the coming years.

The Take: Goodbye to the Stretch Provision and Hello $15.7 Billion in Tax Revenue

Prior to the SECURE Act being passed, non-spouse beneficiaries of qualified retirement plans could take distributions from these accounts based on their own life expectancy, which helped to continue the deferral of income and spread the tax effect of the distributions over a longer period of time. Many financial planners used this “stretch” provision as a planning tool to set up trusts specifically for these assets when the original owner passed away.

For retirement account owners that pass away in 2020 and forward, the non-spouse beneficiaries will have to withdraw the account funds within 10 years of the original owner’s death. Depending on distribution requirements in those 10 years, there will be flexibility in the timing of these distributions.

The main take away is that beneficiaries may now be forced into much higher tax brackets depending on the amount that is in the retirement account upon inheritance, which accelerates and potentially increases tax liability over the course of time.

There are some exceptions to the 10-year rule mentioned above. If the designated beneficiary, with respect to the employee/IRA owner, on the date of death is considered to be:

  1. The surviving spouse of the employee or IRA owner;
  2. A child of the employee or IRA Owner who has not reached the age of majority (18 in Minnesota and most other states – Alabama and Nebraska are 19 and Mississippi is 21);
  3. A chronically ill individual;
  4. Any other individual who is not more than ten years younger than the employee/IRA owner.

If one of these exceptions is met, then the remaining retirement account balance can generally be distributed over the life expectancy of the beneficiary. Following the death of the beneficiary, the account balance must be distributed over 10 years after death of the beneficiary. In the case of number 2, once a child of the employee/IRA owner reaches the age of majority, the account balance must be distributed over 10 years.

Jon Meyer of BGM Wealth Partners digs into this topic a little deeper in his article “The SECURE Act: Two Changes to Your IRA”.

The Gives: Changes for Individuals

Repeal of the maximum age to contribute to a traditional IRA (deductible contributions) – Whether it is voluntarily done or a necessity due to lack of retirement funds, Americans are working further into their golden years now more than ever. The SECURE Act allows for those still in the workforce to continue to contribute to their traditional IRA. Prior to this enactment you were not allowed to contribute to your traditional IRA once you hit the age of 70.5.

Increased age for taking required minimum distributions (RMDs) – For distributions required to be made after December 31, 2019, the required minimum distribution (RMD) age is increased from 70.5 to 72. An RMD will generally need to be made by April 1 of the year following the year the taxpayer reaches age 72 after December 31, 2019.

Expansion of Eligible Expenses for 529 Plans – For distributions made after December 31, 2018, tax-free distributions from 529 plans can now be used to pay for books, supplies and equipment for the beneficiary’s participation in an apprenticeship program that is certified by the Secretary of Labor.

In addition, funds from a 529 plan can now be used to pay principal or interest on a qualified education loan of the beneficiary or a sibling of the beneficiary. There is an individual lifetime limit of $10,000 that can used from a 529 plan to pay principal or interest on a qualified loan without incurring a penalty. Any amount over $10,000 is considered an ineligible distribution and subject to a 10% penalty.

Changes to the Kiddie Tax (again) – For tax years beginning after December 31, 2019, the Kiddie tax rules revert back to the pre-TCJA rules. Once again, children will be subject to their parent’s tax rates on unearned income rather than the income tax brackets related to trusts and estates if their unearned income is more than $2,200. Taxpayers do have the option to apply this new (old) rule to 2018 and 2019 if they elect to do so.

Penalty-Free retirement plan withdrawals for new parents – For distributions made after December 31, 2019, individuals can be eligible for penalty-free withdrawals from “applicable retirement accounts” (the vast majority of accounts out there) for a “qualified birth or adoption distribution”. A qualified distribution is made to an individual during the one-year period beginning on the date on which a child of the individual is born or on which the legal adoption by the individual of an eligible adoptee is finalized.

Additional Income Categories for IRA Purposes – Income from fellowships, stipends and similar amounts, generally received by graduate or postdoctoral students, can now be counted as “compensation” for the purposes of making allowable IRA contributions to the individuals account.

The Gives: Changes for Businesses

Small employer automatic enrollment credit –Generally, if an employer with no more than 100 employees starts a new 401(k) or SIMPLE IRA plan with auto enrollment included in the plan, then the employer may receive a credit of $500 per year for up to three years based on start-up costs of the plan.

Inclusion of long-term, part-time workers in employer 401(k) plans – If an employee has worked over 500 hours per year with an employer for at least three consecutive years and has reached the age of 21 by the end of the third year, then that employee will be considered a “long-term part-time employee” that is eligible to make elective deferrals to the employer plan for plan years that begin after December 31, 2020. Prior to 2021, these individuals were not required to be in the employer plan.

The 105-page bill that covers the SECURE Act has roughly thirty different provisions sprinkled throughout it. The nine mentioned above are most relevant in the tax world (nets the IRS roughly $5 billion in revenue), while most of the other provisions are geared toward plan administrators handling the administration of their employer’s retirement plans.

If you are looking for more detail or have questions on this bill, contact Nate Panning at or reach out to your BGM CPA.

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