What You Need to Know About the SECURE Act and 2020 Tax Extenders

Signed into law at the end of 2019, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), part of the Further Consolidated Appropriations Act, 2020 (H.R. 1865, P.L. 116-94), represents the most extensive change to retirement legislation since the Pension Protection Act of 2006. The SECURE Act aims to make it easier for individuals to gain access to retirement plans and addresses current trends of people both living longer and choosing to delay retirement. The SECURE Act made several key changes that impact both businesses and individuals.

SECURE Act Implications

Often estate planning is centered around equitable heir distribution, asset protection and estate tax exposure, but with the elimination of the Stretch IRA for most non-spousal beneficiaries, planning strategies are now more focused on income tax and liquidity events that will occur during the life of those inheriting the assets. Ultimately, the SECURE Act will impact many aspects of personal planning, including financial, tax and estate.

Revisit Trusts Designated as Beneficiaries of IRAs. Under the SECURE Act, trusts are subject to the 10-year rule, which means an IRA that is transferred into a trust upon the death of the owner must be distributed within 10 years. Therefore, it is important to revisit trust language to make sure it allows for distributions or access throughout the 10-year period – otherwise the impact of a single taxable event at the end of 10 years could be significant. It is also important to note that a conduit trust may still meet the “Stretch” provision if it is in the name of a designated eligible beneficiary, which includes: surviving spouse, the chronically ill (defined by the IRS), the disabled (defined by the IRS), a minor child, or person not more than 10 years younger than the decedent.

Life Insurance. With larger upfront income taxation for nonspousal beneficiaries, estate planning utilizing life insurance can help pay the income tax. Account owners may also take distributions from retirement assets to fund single life or survivorship life insurance policies for tax-free death benefits for their heirs. In addition, purchasing life insurance within a life insurance trust is a useful tool for tax-free liquidity upon death; beneficiaries will be required to pay more income tax upfront, and life insurance payouts can then assist in relieving the income tax cash flow burden for those beneficiaries. This strategy has always been useful with large estates and the estate tax burden, but now there is more use for income tax planning with smaller estates.

Charitable Remainder Trusts. More complex in nature, an attractive alternative to a “Stretch” IRA is naming a charitable remainder annuity trust (CRAT) or charitable remainder unitrust (CRUT) as the beneficiary of retirement accounts. This enables the trust asset to continue to grow tax deferred for the charity and the lifetime trust beneficiaries, such as children or grandchildren, to benefit from taxable distributions during their lifetime, allowing such beneficiaries to stretch the distributions out to more than the 10-year limit. At the passing of the beneficiary, the rest of the accumulated assets in the trust would pass to the charities.

Roth Conversions. Converting tax-deferred IRAs to Roth IRAs is a potential hedge against higher taxation after the sunset of the Tax Cuts and Jobs Act (TCJA) in 2025, as well a strategy to help minimize taxes for your heirs. A series of Roth conversions may be an opportunity to pay any tax owed on the funds today, thereby allowing your beneficiaries to inherit the funds tax-free in the future. However, while a Roth IRA does allow for 10 additional years of tax free-growth to a nonspousal beneficiary, the taxes on the Roth conversion should be carefully considered since the tax-free growth potential remains limited by the mandatory distribution requirement of the SECURE Act. Roth conversions require careful tax planning since in the year the conversion takes place, the tax brackets will be based on all income received from all sources.

  • Increased tax credit available for small business owners to set up companysponsored retirement plans.
    • Credit applies for up to three years.
    • Previous maximum credit amount was $500.
    • New maximum credit is $5,000.
  • New tax credit of up to $500 available for employers that implement an automatic enrollment feature in their 401(k) plan.
    • Auto-enrollment increases plan participation, helping more individuals save for retirement.
  • Small businesses have easier access to join multiple employer plans (MEPs) regardless of industry, location or affiliation.
    • Enables smaller businesses to access pricing models for retirement plans similar to those of larger organizations.
  • Expanded investment options available within 401(k) plans, including annuity and insurance products.
  • Deadline modification for businesses to establish a retirement plan has been moved from end of the year to the tax return filing due date.
  • Encourages employers to allow guaranteed lifetime income options in retirement plans.
  • Allows employees to participate who work at least 500 hours per year for the past three consecutive years.
  • Required minimum distributions (RMDs) to start at age 72.
    • Previous rule: age 70½.
  • IRA contributions can now be made after age 70½ as long as earned income exists.
  • Elimination of the “stretch IRA” - Beneficiaries of qualified retirement accounts no longer must take RMDs, but the entire account must be distributed within 10 years of inheritance.
    • Exceptions to the general rule include spouses, minor children, certain disabled individuals and individuals who are not more than 10 years younger than the plan employee.
    • Those inheriting retirement accounts before Jan. 1, 2020, are grandfathered in under the old rules.
  • Certain taxable non-tuition fellowship and stipend payments treated as compensation for IRA purposes.
  • Expanded access for part-time employees to participate in company-sponsored retirement plans.
    • Those working at least 500 hours in three consecutive years are eligible. Previously, the requirement was 1,000 hours in a year.
    • New rule applies to plan years beginning on or after Jan. 1, 2021.
  • Parents can access money in their 401(k) plans or IRAs penalty-free to help pay for the birth or adoption of a child. (during the first year following the birth or adoption).
    • Each parent can withdraw up to $5,000 penalty free (must pay income tax on the amount withdrawn) for the birth or adoption of each qualifying child.
    • No limit on the number of births or adoptions that qualify.
    • Previously, 10 percent penalty would have applied to such a withdrawal.
  • Expanded use of 529 college savings plans.
    • Can be used for student loan repayments (up to $10,000) of the designated beneficiary and their siblings and costs associated with apprenticeships.

IRA Considerations. Due to the elimination of the “Stretch” IRA, leaving the IRA to the surviving spouse allows for a further extension on income taxability if other assets are available to cover any cash flow needs. When the surviving spouse passes away, the IRA beneficiary may then be designated to surviving children; though they will have 10 years to take any RMDs and pay income tax, they will have allowed for a greater deferral than if they were the initial beneficiary. A hedging strategy may be considered in order to split beneficiaries between the spouse and children.

Other Tax-Related Considerations in H. R. 1865

The SECURE Act is only one part of the broader legislation – other takeaways from this law include the following:

Repeal of these Patient Protection and Affordable Care Act (ACA) taxes:

  • “Cadillac tax” on high-value health insurance benefits - effective Jan. 1, 2020.
  • Medical device tax - effective Jan. 1, 2020.
  • Health insurance tax (HIT) - effective 2021.

Repeal of Tax Cuts and Jobs Act (TCJA) changes to the “kiddie tax,” reverting back to using the parents’ top marginal tax rate – effective for the 2020 tax year (can elect to apply to the 2018 and 2019 tax years as well).

Repeal of TCJA section 512(a)(7) provision, where non-profit employer-provided parking was subject to a 21 percent unrelated business income tax (UBIT).

Change to disaster relief policies - taxpayers impacted by a major disaster can make tax-favored withdrawals from retirement plans.

Extension of other tax provisions on a short-term basis, such as:

  • Employee retention credit for employers - provides employers a tax credit for paying employees during time periods and locations affected by qualified disasters.
  • Qualified personal residence indebtedness - if defaulting on a mortgage used to buy, build or substantially improve a main residence, amount can be excluded from income – was expired, now renewed.
  • Mortgage insurance premium/PMI deduction treated as qualified residence interest - now extended through 2020.
  • Medical expenses deduction for those with healthcare expenses exceeding 7.5 percent of adjusted gross income (previously the threshold was changed to 10 percent of AGI). 7.5 percent floor can be used for 2019 and 2020.
  • Qualified tuition and related expenses deduction allowing you to subtract the cost of college tuition and education fees above-the-line from taxable income - extended through 2020.
  • Employer credit for paid family and medical leave (FMLA) renewed through 2020.
  • Work opportunity tax credit for employers hiring individuals from groups facing barriers to employment – now applies through 2020.
  • Several energy and environmental tax breaks extended or reinstated, including:
    • Biodiesel and renewable diesel tax credits.
    • Section 179D energy tax deduction for green construction.
    • Section 45L tax credit for developers of energyefficient dwellings.
  • Federal excise taxes on beer and spirits – lower tax rate remains in place through 2020.

For more specifics on the tax implications of the SECURE Act and H. R. 1865, reach out to us at tax@dhg.com.

For questions about the impact of the SECURE Act on your retirement, reach out to DHG Wealth Advisors at info@dhgwa.com.

This summary is for informational purposes only and does not constitute investment advice or an offer to buy or sell any security. The information is believed to be accurate as of the time it is distributed and may become inaccurate or outdated with the passage of time. You should contact your financial advisor or CPA professional before making any tax or investment-related decision. Past performance does not guarantee future results. All investments may lose money.


Sarah Paris
Financial Advisor
DHG Wealth Advisors

Maria Tobin
Vice President/Financial Consultant
DHG Agency

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