The SECURE Act and Self-Directed Retirement Plans

Published on February 3, 2020

The SECURE Act, signed into law on December 20, 2019, is comprehensive legislation written to expand retirement savings, simplify existing rules, preserve retirement income, and improve plan administration. SECURE stands for Setting Every Community Up for Retirement Enhancement.

The bill mostly makes significant changes to workplace retirement plans; other provisions affect retirement plans in general, including self-directed IRAs. Here is a look at some of the changes, effective January 1, 2020.

Individuals

For those who own a self-directed Traditional or Roth IRA:

• Increase in RMD age for Traditional IRAs – The required minimum distribution age is now 72. Individuals who turn 70½ in 2020 would not be required to take a minimum distribution until April 1^st of the year in which they turn 72. This only applies to individuals who turn 72 in 2020 or later.
• Contribute to your Traditional IRA longer – Workers age 70½ and older with earned income may now continue contributing to a Traditional IRA—and continue building up retirement savings. This only applies to individuals who are turning 70½ in 2020 and later.
• Tax penalty exemption for birth or adoption of a child – For a qualified birth or adoption, the account holder can withdraw a total of $5,000 as an early distribution without the 10% penalty, when the distribution occurs within one year of the event. Income taxes still apply.
• Graduate student IRA contributions – Certain payments to graduate and postdoctoral students will be treated as earned income for IRA contribution purposes.
• No more stretch IRAs – The lifetime distribution option for certain non-spousal IRA beneficiaries is now eliminated and most non-spouse inheritors who are more than 10 years younger than the deceased IRA owner will be required to take all distributions within 10 years. Exceptions include beneficiaries who, at the time of the account owner’s death, are:
  • Disabled or have certain chronic illnesses
  • Within 10 years of the decedent’s age
  • Minors (10-year payout period begins upon reaching the age of majority)
  • Recipients of certain annuitized payments begun before enactment of the SECURE Act.

Business Owners

For business owners who have a SEP IRA, Solo 401k, or other qualified retirement plan:

• Longer deadline to establish a plan – Now employers may establish a qualified plan as late as their business tax filing deadline, including extensions, rather than the last day of the company’s business year. This extension will not apply to certain plan provisions.
• Increase in small-employer plan startup credit – Up to $5,000 per year, effective for 2020 and later taxable years, for employers with up to 100 employees over a three-year period beginning after December 31, 2019. The credit applies to SEP, SIMPLE, 401(k), and profit-sharing plans.
• Automatic enrollment credit – Employers that include an automatic enrollment feature in their new or existing small 401(k) plans or SIMPLE IRA plans will get a maximum annual tax credit of $500 for each of the first three years that the plan is maintained. (Effective for 2020 and later taxable years.)
• Participation by part-time employees – Employees who work at least 500 hours over three consecutive 12-month periods (and who satisfy the plan’s minimum age requirement) must be offered participation in the employer’s 401(k) plan.

All SECURE provisions have tax consequences for individuals and plan sponsors. As always, the team at Next Generation strongly recommends you consult your trusted advisor regarding how the SECURE Act provisions may affect your specific tax situation.

Secure a more diverse retirement portfolio through self-direction

In light of the recent changes, consider including alternative assets within a self-directed retirement plan. Those who are comfortable making their own investment decisions and who understand certain nontraditional investments can build up their retirement savings—and hedge against stock market volatility—with such assets as real estate, precious metals, private equity, hedge funds, private notes, and more.

At Next Generation, we’re here to answer your questions about self-direction as a retirement wealth-building strategy, or how certain provisions of SECURE may affect your self-directed retirement plan. You can arrange a complimentary educational session with one of our representatives, or contact us directly at 888.857.8058 or NewAccounts@NextGenerationTrust.com for more information.