Profile Photo
Daniel F. Rahill, LL.M, CPA, J.D.
Managing Director
Wintrust Wealth Management

On Friday December 20, 2019, a major overhaul of the rules for retirement plans and IRAs, known as the SECURE Act, was signed into law. Generally effective on January 1, 2020, the bipartisan law is primarily taxpayer friendly, encouraging savings in various ways and making it easier for employers to offer retirement plans. Summarized below are the key changes impacting retirement plans and tax provisions.

Increased Flexibility in Retirement and Education Savings Accounts
Repeal of Maximum Age for Traditional IRA Contributions
The new law ends the age restriction on contributions to a traditional IRA once the individual has attained the age of 70 ½. As Americans live longer, an increasing number continue employment beyond the traditional retirement age. Therefore, taxpayers with earned income can make IRA contributions at any age beginning in 2020.

Increase Age for Required Minimum Distributions
Under previous law, participants are generally required to begin taking distributions from their retirement plans at age 70 ½. The policy behind this rule is to ensure that individuals spend their retirement savings during their lifetime and not use their retirement plans for estate planning purposes to transfer wealth to beneficiaries. The age 70 ½ was first applied in the retirement plan context in the early 1960s and has never been adjusted to take into account increases in life expectancy. The new law increases the required minimum distribution age from 70 ½ to 72 for people who turn 70 ½ after December 31, 2019.

Penalty-free Withdrawals for Birth or Adoption
While the previous law exempts certain distributions from qualified plans from the 10% tax penalty on early withdrawals prior to age 59 ½, the new law now includes “qualified birth or adoption distributions” as qualifying for such penalty-free withdrawals.

Annuity Portability Options
The legislation permits qualified defined contribution plans, section 403(b) plans, or governmental section 457(b) plans to make a direct trustee-to-trustee transfer to another employer-sponsored retirement plan or IRA of lifetime income investments or distributions of a lifetime income investment in the form of a qualified plan distribution annuity, if a lifetime income investment is no longer authorized to be held as an investment option under the plan. This annuity portability change will permit participants to preserve their lifetime income investments and avoid surrender charges and fees.

Allowable 529 Plan Withdrawals Expanded
The new law expands 529 education savings accounts to cover costs associated with registered apprenticeships; homeschooling; up to $10,000 of qualified student loan repayments (including those for siblings); and private elementary, secondary, or religious schools.

New Ways to Save More in Employer Plans
401(k) Plan Safe Harbor Rules
The legislation includes various changes designed to provide greater flexibility, improve employee protection and facilitate plan adoption. It streamlines the safe-harbor notice requirement for non-elective contributions but maintains the requirement allowing employees to make or change an election at least once a year.

Part-time Workers Participation in 401(k) Plans
Under previous law, employers generally may exclude part-time employees (employees who work less than 1,000 hours per year) when providing a defined contribution plan to their employees. As women are more likely than men to work part-time, these rules can be quite harmful for women in preparing for retirement. Except in the case of collectively bargained plans, the new law will require employers maintaining a 401(k) plan to have a dual eligibility requirement under which an employee must complete either a one year of service requirement (with the 1,000-hour rule) or three consecutive years of service where the employee completes at least 500 hours of service. In the case of employees who are eligible solely by reason of the latter new rule, the employer may elect to exclude such employees from testing under the nondiscrimination and coverage rules, and from the application of the top-heavy rules.

Credits for Small Business Owners
Increase Credit for Start-Up Costs
Prior to the new law, small businesses could claim a credit equal to 50% of the start-up costs of a qualified plan, up to a maximum of $500. The new law increases the credit limit up to a maximum of $5,000 for each of the first three years effective for 2020 and later years.

Automatic Enrollment Credit
To encourage greater employee participation in qualified retirement plans, the legislation creates a new tax credit of up to $500 per year to employers to defray startup costs for new section 401(k) plans and SIMPLE IRA plans that include automatic enrollment. The credit is in addition to the plan start-up credit allowed under present law and would be available for three years. The credit would also be available to employers that convert an existing plan to an automatic enrollment design.

Tightened Retirement Account Restrictions
Stretch IRA Required Minimum Distributions
While most aspects of the new legislation are advantageous for taxpayers, this provision adversely affects many taxpayers by modifying the required minimum distribution rules with respect to defined contribution plan and IRA balances upon the death of the account owner. Under the new law, “stretch IRA” distributions to individuals other than the account owner’s surviving spouse or minor child, disabled or chronically-ill individuals, or individuals who are less than ten years younger than the account owner are generally required to be distributed within ten years of the account owner’s death. Since retirement accounts make up the largest share of many Americans’ net worth, the loss of “stretch” may encourage wealthier Americans to consider other, more comprehensive estate planning strategies for their retirement assets.

Loan Restrictions through Credit Cards and Other Similar Arrangements
The new legislation prohibits the distribution of plan loans through credit cards or similar arrangements. The intent of the change is to ensure that plan loans are not used for routine or small purchases, thereby preserving retirement savings.

Improvements in Qualified Plan Administration

  • The legislation permits businesses to treat qualified plans adopted before the due date (including extensions) of the tax return for the taxable year as having been adopted as of the last day of the taxable year.
  • The legislation also facilitates the filing of a consolidated Form 5500 for similar plans to reduce costs and provide additional flexibility for plan sponsors. Plans eligible for consolidated filing must be defined contribution plans, with the same trustee, the same named fiduciary (or named fiduciaries) under ERISA, and the same administrator, using the same plan year, and providing the same investments or investment options to participants and beneficiaries.
  • The new law requires benefit statements provided to defined contribution plan participants to include a lifetime income disclosure at least once during any 12-month period. The disclosure would illustrate the monthly payments the participant would receive if the total account balance were used to provide lifetime income streams, including a qualified joint and survivor annuity for the participant and the participant’s surviving spouse and a single life annuity.
  • Finally, the legislation modifies the nondiscrimination rules with respect to closed plans to permit existing participants to continue to accrue benefits. The modification will protect the benefits for older, longer service employees as they near retirement.

Other Non-Retirement Tax Law Changes
The new law also contains various other tax extenders and provisions beyond those outlined above. Most notable of the changes impacting taxes are:

  • The repeal of excise taxes on high cost employer-sponsored health coverage (“Cadillac” plans), the medical device tax, and the fee on health insurance providers.
  • The estate and trust tax rates applied to certain unearned income of children (the “kiddie tax” provision), have been changed to the parents’ tax rate.
  • Finally, a number of expired tax provisions were extended through 2020, including the 7.5% (instead of 10%) adjusted gross income floor for medical expense deductions and the above-the-line deduction for qualified tuition and related expenses.

This was undoubtedly a significant piece of legislation with provisions which will continue to be analyzed with numerous different effective dates. Consult your financial advisor to better understand how the new law affects your retirement savings and financial plan.


This material is distributed for informational purposes only. This information is supplied from sources we believe to be reliable but we cannot guarantee its accuracy. Please review with your accountant or tax advisor before using this information for tax reporting purposes.