IRA Reform on Horizon – SECURE Act of 2019

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On May 23, 2019, the House passed the Setting Every Community Up for Retirement Enhancement Act of 2019 with a vote of 417 Yeas and 3 Nays. The SECURE Act, as it has been nicknamed, is now on its way to the Senate. You can read the House’s text of the bill here.

Here’s an overview of the big changes it has:

Repeal of Maximum IRA Contribution Age

This new bill repeals Paragraph (1) of section 219(d), which reads, “(1) Beneficiary must be under age 70½ – No deduction shall be allowed under this section with respect to any qualified retirement contribution for the benefit of an individual if such individual has attained age 70½ before the close of such individual’s taxable year for which the contribution was made.”

This means that you can now contribute a deductible traditional IRA contribution at any age.

They also amended Qualified Charitable Distribution (QCD) to say that the amount of your gift that counts as a QCD and thus is not includible in gross income:

shall be reduced (but not below zero) by an amount equal to the excess of–

(i) the aggregate amount of deductions allowed to the taxpayer under section 219 for all taxable years ending on or after the date the taxpayer attains age 70½, over

(ii) the aggregate amount of reductions under this sentence for all taxable years preceding the current taxable year.

This effectively means you will have to choose between taking the IRA deduction or making a QCD, as your QCD will be reduced by the amount of IRA deduction you take.

Regular Required Minimum Distribution (RMD) Required Beginning Date Change

This new law proposes changing the required beginning date from the year you turn age 70 1/2 to the year you turn age 72.

“The amendments made by this section shall apply to distributions required to be made after December 31, 2019, with respect to individuals who attain age 70½ after such date.”

Meaning someone who was going to turn 70 1/2 in 2020 will now be able to wait one or maybe two more years until the year they will turn 72.

Inherited Required Minimum Distribution (RMD) Change

Naturally, I just finished writing the “The Full Complexity of All Required Minimum Distribution Divisors Explained,” and now they are proposing reforming the inherited divisor law. Oh, well. Here are the changes:

First off, current law means that if you don’t have an exception, you have to distribute the whole balance of the inherited IRA in 5 years. The new proposed law extends this to ten years.

Unfortunately, they also add that this 10-year distribution rule “shall apply whether or not distributions of the employee’s interests have begun.” Meaning, even if the decedent was older than 70 1/2, you lose the option of taking the RMD using their divisor and are required to take it out over 10 years. It clarifies that the option of utilizing the decedent’s divisor  “shall apply only in the case of an eligible designated beneficiary.” Meaning designated beneficiaries still have this exception, although only when they were older than the decedent.

Second, in current law, second generation beneficiaries inherited the first designated beneficiaries divisor. This new proposal strikes this, stating, “If an eligible designated beneficiary dies before the portion of the employee’s interest to which this subparagraph applies is entirely distributed, the exception under clause (iii) shall not apply to any beneficiary of such eligible designated beneficiary and the remainder of such portion shall be distributed within 10 years after the death of such eligible designated beneficiary.” This means that second generation beneficiaries would need to distribute the whole IRA within 10 years.

Third is the worst update.

They state that the “Exception to the 5-year rule for certain amounts payable over the life of the beneficiary” which creates the inherited divisor stretch provisions “shall apply only in the case of an eligible designated beneficiary.” Then, they add a definition for the term “eligible designated beneficiary” as only someone who is:

  1. the surviving spouse of the employee,
  2. subject to clause (iii), a child of the employee who has not reached majority (within the meaning of subparagraph (F)),
  3. disabled (within the meaning of section 72(m)(7)),
  4. a chronically ill individual (within the meaning of section 7702B(c)(2), except that the requirements of subparagraph (A)(i) thereof shall only be treated as met if there is a certification that, as of such date, the period of inability described in such subparagraph with respect to the individual is an indefinite one which is reasonably expected to be lengthy in nature), or
  5. an individual not described in any of the preceding subclauses who is not more than 10 years younger than the employee.

The child exception clause iii states:

Subject to subparagraph (F), an individual described in clause (ii)(II) shall cease to be an eligible designated beneficiary as of the date the individual reaches majority and any remainder of the portion of the individual’s interest to which subparagraph (H)(ii) applies shall be distributed within 10 years after such date.

This means that non-nuclear family who are more than 10 years younger than the decedent are never eligible for stretch provisions. Furthermore, children of the decedent are only granted stretch provisions until they are of majority age. Spouses are still given their spousal rollover (although they can also have stretch). So it is really only the disabled or chronically ill who are given stretch provisions for their lifetime.

Last, they state, “The determination of whether a designated beneficiary is an eligible designated beneficiary shall be made as of the date of death of the employee.” Which I suppose means if you are disabled or chronically ill at the decedent’s demise, but then you get better, you are able to retain your stretch.

This law will only affect people “who die after December 31, 2019.” For no good reason, they also give governmental employees an exception, so that it only applies to people who die after December 31, 2021.

They also write, “The amendments made by this subsection shall not apply to a qualified annuity which is a binding annuity contract in effect on the date of enactment of this Act and at all times thereafter.”

New Penalty-Free IRA Withdrawal

Under current law, there are already several cases you are permitted penalty-free withdrawals from IRAs even when you are before age 59 1/2.

This new proposed bill adds “any distribution from an applicable eligible retirement plan to an individual if made during the 1-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.”

The bill limits the distribution so that it “shall not exceed $5,000.”

The neat part about this penalty-free withdrawal is that the new proposed bill says that this qualified birth or adoption distribution may be repaid. It reads, “Any individual who receives a qualified birth or adoption distribution may make one or more contributions in an aggregate amount not to exceed the amount of such distribution to an applicable eligible retirement plan of which such individual is a beneficiary and to which a rollover contribution of such distribution could be made.”

“The amendments made by this section shall apply to distributions made after December 31, 2019.”

529 Plan Expansion to Registered Apprenticeships and Student Loans

First, they add the following paragraph to the code:

(8) TREATMENT OF CERTAIN EXPENSES ASSOCIATED WITH REGISTERED APPRENTICESHIP PROGRAMS.—Any reference in this subsection to the term ‘qualified higher education expense’ shall include a reference to expenses for fees, books, supplies, and equipment required for the participation of a designated beneficiary in an apprenticeship program registered and certified with the Secretary of Labor under section 1 of the National Apprenticeship Act (29 U.S.C. 50).

This would expand 529 qualified expenses to registered apprenticeship programs.

Second, the new law writes, “Any reference in this subsection to the term ‘qualified higher education expense’ shall include a reference to amounts paid as principal or interest on any qualified education loan (as defined in section 221(d)) of the designated beneficiary or a sibling of the designated beneficiary.”

This would expand 529 qualified expenses to include education loan repayment for the beneficiary or the beneficiary’s siblings.

They write, “The amendments made by this section shall apply to distributions made after December 31, 2018.”

The Ways and Means summary document says about this section, (emphasis added) “The legislation 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.” However, I see no mention to homeschooling or any synonym in the actual May 2019 text that was passed in the house. It looks like it used to be in the March 2019 version of the bill, but was removed from the bill before passing it.

More Headache for Retirement Plan Sponsors

This new bill says, “not later than 1 year after the date of the enactment of the Setting Every Community Up for Retirement Enhancement Act of 2019” the Secretary of the retirement plan must “issue a model lifetime income disclosure, written in a manner so as to be understood by the average plan participant, which

(I) explains that the lifetime income stream equivalent is only provided as an illustration;

(II) explains that the actual payments under the lifetime income stream described in clause (i)(III) which may be purchased with the total benefits accrued will depend on numerous factors and may vary substantially from the lifetime income stream equivalent in the disclosures;

(III) explains the assumptions upon which the lifetime income stream equivalent was determined; and

(IV) provides such other similar explanations as the Secretary considers appropriate.

Within one year, the Secretary also must “prescribe assumptions which administrators of individual account plans may use in converting total accrued benefits into lifetime income stream equivalents for purposes of this subparagraph.”

What a useless disclosure.

Fortunately, sponsors are also afforded, in this proposed bill, a $500 tax credit if the employer “includes an eligible automatic contribution arrangement (as defined in section 414(w)(3)) in a qualified employer plan (as defined in section 4972(d)) sponsored by the employer” and a larger credit for setting up a employer pension plan in the first place.

This bill also changes the Safe Harbor 401(k) Rules.

New “Pooled Employer Plan” Option

The bill also proposed a new kind of employer-sponsored plan called a “pooled employer plan” or “multiple employer plan.” This would permit one employer, such as Marotta Wealth Management, to open one 401(k) retirement plan and permit other employers and their employees to participate in the very same plan.

This could be good news as it could lower the burden of record keeping and set-up costs by dividing it among more participants.

The new bill makes clear, “Except with respect to the administrative duties of the pooled plan provider described in paragraph (44)(A)(i), each employer in a pooled employer plan shall be treated as the plan sponsor with respect to the portion of the plan attributable to employees of such employer (or beneficiaries of such employees).”

Photo by Chris Lawton on Unsplash

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Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. Her most popular post: The Complete Guide to Your Washing Machine