Are you or your family affected?

The “Setting Every Community Up for Retirement Enhancement” Act (the SECURE Act), which was signed into law by the President on December 20, 2019, significantly modifies many requirements for employer-provided retirement plans, individual retirement accounts (IRAs), and other tax-favored savings accounts. These changes in the law, many which have gone into effect as of January 1, 2020, might provide you and your family with tax-savings opportunities. However, not all of the changes are favorable, and there may be steps you can take to minimize their impact.

Here is a summary of some of the key provisions of the Secure Act:

Repeal of the maximum age for traditional IRA contributions. Before 2020, traditional IRA contributions were not allowed once the individual attained age 70 1/2. Starting in 2020, the new rules allow an individual of any age to make contributions to a traditional IRA, as long as the individual has compensation, which generally means earned income from wages or self-employment.

Required minimum distribution age raised from 70 1/2 to 72. Before 2020, retirement plan participants and IRA owners were generally required to begin taking required minimum distributions, or RMDs, from their plan by April 1 of the year following the year they reached age 70 1/2. The age 70 1/2 requirement was first applied in the retirement plan context in the early 1960s and, until recently, had not been adjusted to account for increases in life expectancy. For distributions required to be made after Dec. 31, 2019, for individuals who attain age 70 1/2 after that date, the age at which individuals must begin taking distributions from their retirement plan or IRA is increased from 70 1/2 to 72.

Partial elimination of stretch IRAs. For deaths of plan participants or IRA owners occurring before 2020, beneficiaries (both spousal and non-spousal) were generally allowed, with proper planning, to stretch out the tax-deferral advantages of the plan or IRA by taking distributions over the beneficiary’s life or life expectancy (in the IRA context, this is sometimes referred to as a “stretch IRA”). This potentially allows the retirement funds to grow tax-free for decades.

However, for deaths of plan participants or IRA owners beginning in 2020 (later for some participants in collectively bargained plans and governmental plans), distributions to most non-spouse beneficiaries are generally required to be distributed within ten years following the plan participant’s or IRA owner’s death. So, for those beneficiaries, the “stretching” strategy is no longer allowed.

Exceptions to the 10-year rule are allowed for distributions to (1) the surviving spouse of the plan participant or IRA owner; (2) a child of the plan participant or IRA owner who has not reached majority; (3) a chronically ill individual; and (4) any other individual who is not more than ten years younger than the plan participant or IRA owner. Those beneficiaries who qualify under this exception may generally still take their distributions over their life expectancy (as allowed under the rules in effect for deaths occurring before 2020).

Penalty-free retirement plan withdrawals for expenses related to the birth or adoption of a child. Generally, a distribution from a retirement plan must be included in income. And, unless an exception applies (for example, distributions in case of financial hardship), a distribution before the age of 59 1/2 is subject to a 10% early withdrawal penalty on the amount includible in income. Starting in 2020, plan distributions (up to $5,000) that are used to pay for expenses related to the birth or adoption of a child are penalty-free. (You’ll still owe income tax on the distribution, though, unless you repay the funds). The $5,000 amount applies on an individual basis, so for a married couple, each spouse may receive a penalty-free distribution up to $5,000 for a qualified birth or adoption.

Participation in 401K plans will be available to certain part-time employees. Part time employees who have not worked at least 1,000 hours during the year have typically not been allowed to participate in their employer’s 401(k) plan. Starting in 2021, the new retirement law will guarantee 401(k) plan eligibility for employees who have worked at least 500 hours per year for at least three consecutive years. The part-timer must also be 21 years old by the end of the three-year period.

Multiple employer plans for small businesses. The new law will make it easier for small businesses to join together to provide retirement plans for their employees. Starting in 2021, the new law will allow completely unrelated employers to participate in a multiple employer plan and have a “pooled plan provider” to administer it. This provision should allow unrelated small businesses to leverage economies of scale not otherwise available to them, which typically results in lower administrative costs.

As a result of this significant change in how retirement plan funds can be distributed, many existing estate plans will now not work the way they were expected to work. Such plans should be reviewed and updated as soon as possible.

To discuss how this new law may affect you, please contact Jonathan Samel at 215-661-0400 or