How the SECURE Act Tax Law Affects Retirement Plans

How the Secure Act Tax Law Affects Retirement Plans

The Senate passed the SECURE Act last week, and the President promptly signed it into law. This is the first significant retirement tax law change in many years and will affect most IRA holders. These rules apply to all types of retirement plans, both traditional and self-directed. At Midland, our focus is on self-directed IRA administration but all retirement plan holders will notice these changes. The highlights are as follows.

The SECURE Act stands for (Setting Every Community Up for Retirement Enhancement). The law, signed on December 20, 2019, has the goal of helping the average American plan for retirement. This goes into effect on January 1, 2020.

SECURE Act: Five Things to Know

  1. Traditional retirement accounts will have to be withdrawn from starting at age 72 rather than 70.5 (“required minimum distributions”). Those who are already 70.5 or older should proceed as scheduled under previous rules. This only applies to those who turn 70.5 after January 1, 2020. This allows additional time for your Traditional IRA to grow untouched!
  2. You can contribute to your traditional IRA after age 70.5, provided you have earned income.
  3. You’ll have to pay taxes on inherited IRAs sooner, and the “stretch” IRA is going away for many beneficiaries. For example, if you named your grandchild as your beneficiary, most of your account can stay invested for decades past your death, and your grandchild could continue to reap the benefits. Under the new law, however, most beneficiaries will have to withdraw all the distributions from their inherited account and pay taxes on it within ten years. Exceptions are made for spouses, chronically ill, disabled, or beneficiaries within ten years of age of the IRA owner. This is not retroactive and will not affect those who have already inherited an IRA.
  4. You may see a new annuity option in your 401(k). Annuities are insurance products that help with the complicated task of turning life savings into a sustainable income after retirement. The bill gives increased legal cover to employers, and it’s expected to open the way for more annuity options in 401(k) plans.
  5. If you work part-time or for a small business, are a debt-ridden student, or a new parent, you may have a 401(k) for the first time. This new legislation makes it easier for small businesses to offer retirement plans. Now, any combination of small businesses can join to provide benefits to their employees. Also, employers will now be required to offer 401(k)s to part-time employees who work at least 500 hours a year for three consecutive years or 1,000 hours for one year. SECURE makes provisions for a withdrawal of up to $10,000 from 529 plans to repay student loans. New parents will be able to withdraw $5,000 penalty-free to offset the cost of qualified delivery or adoption expenses.

The SECURE ACT affects all qualified plans:

  • IRAs (Traditional and Roth)
  • 401(k)
  • 403(b)
  • 457(b)
  • 401(a)
  • ESOPs
  • Cash Balance plans
  • Lump sums from defined benefit plans

What this means for you:

  • If the balance of your IRA is under $100,000, the consequence will be minimal and unlikely to affect you adversely.
  • If your IRA is between $100,000 and $400,000, the effect may be significant given the ages, income, and number of beneficiaries.
  • If your IRA is above $400,000, SECURE might be consequential. A review of your financial and estate plans, as well as a conversation with your financial professional, should be considered.

Financial Planning professionals can assist with:

  • Pre-mortem vs. post-mortem planning
  • Pre-tax vs. post-tax contributions
  • Tax considerations

If you need additional information about the SECURE Act, please feel free to contact Midland Trust at or phone 239-333-1032. Midland has been in business since 2002, administers over $2 billion in client assets and more than 16,000 IRA accounts. Midland is a Custodial Trust IRA Company and is not a fiduciary.