The SECURE Act and you
New legislation aims to improve retirement security for many Americans
Key takeaways—The SECURE Act:
Repeals the maximum age for traditional IRA contributions, which is currently 70½.
Increases the required minimum distribution (RMD) age for retirement accounts to 72.
Offers more options for lifetime income strategies.
Permits parents to withdraw up to $5,000 from retirement accounts penalty-free within a year of birth or adoption for qualified expenses.
Allows parents to withdraw up to $10,000 from 529 plans to repay student loans.
As part of a larger government spending package, which was signed into law on December 20, 2019, Congress included provisions from the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The important retirement legislation reflects policy changes to defined contribution plans (such as 401(k)s), defined benefit pension plans, individual retirement accounts (IRAs), and 529 college savings accounts. Most provisions in the law go into effect on January 1, 2020.
Here's a summary of key provisions of the SECURE Act:
Required minimum distributions (RMDs) now begin at age 72
Americans are working longer and will no longer be required to withdraw assets from IRAs and 401(k)s at age 70½.
RMDs now begin at age 72 for individuals who turn 70½ in the calendar year 2020.
If you turned age 70½ in 2019 and have already begun taking your RMDs, you should generally continue to take your RMDs. The IRS may provide further guidance on this point, so you might want to speak with your tax advisor regarding any 2020 distributions.
You can make IRA contributions beyond age 70½
As Americans live longer, an increasing number are continuing to work past their traditional retirement age.
Under the act, you can continue to contribute to your traditional IRA past age 70½ as long as you are still working. That means the rules for traditional IRAs will align more closely with 401(k) plans and Roth IRAs.
Pushing the RMD age out to age 72 does not change the qualified charitable distribution (QCD) rule. Thus, a taxpayer who is 70½ may make a QCD and reduce his or her RMD. Because IRA contributions are now deductible for those who qualify for the QCD provision, SECURE reduces the allowable QCD by the IRA deduction allowed for a taxpayer over 70½.
Inherited IRA distributions generally must now be taken within 10 years
Previously, if you inherited an IRA or 401(k), you could "stretch" your distributions and tax payments out over your single life expectancy. Many people have used "stretch" IRAs and 401(k)s as reliable income sources.
Now, for IRAs inherited from original owners who have passed away on or after January 1, 2020, the new law requires many beneficiaries to withdraw assets from an inherited IRA or 401(k) plan within 10 years following the death of the account holder.
Exceptions to the 10-year rule include assets left to a surviving spouse, a minor child, a disabled or chronically ill beneficiary, and beneficiaries who are less than 10 years younger than the original IRA owner or 401(k) participant.
529 funds can now be used to pay down student loan debt, up to $10,000
In some cases, families have money remaining in their college savings plans after their student graduates. Now, they can use a 529 savings account to pay up to $10,000 in student debt over the course of the student's lifetime.
Under the new law, a 529 plan may also be used to pay for certain apprenticeship programs.
Long-term, part-time workers will be able to join their company's 401(k) plan
Up until now, if you worked less than 1,000 hours per year, you were generally ineligible to participate in your company's 401(k) plan.
Except in the case of collectively bargained plans, the law now requires employers maintaining a 401(k) plan to offer one to any employee who worked more than 1,000 hours in one year, or 500 hours over 3 consecutive years.
Small-business owners can receive a tax credit for starting a retirement plan, up to $5,000
The new law provides a start-up retirement plan credit for smaller employers of $250 per non-highly compensated employees eligible to participate in a workplace retirement plan at work (minimum credit of $500 and maximum credit of $5,000).
This credit would apply to small employers with up to 100 employees over a 3-year period beginning after December 31, 2019 and applies to SEP, SIMPLE, 401(k), and profit-sharing types of plans.
If the retirement plan includes automatic enrollment, an additional credit of up to $500 is now available.
Small-business owners will find it easier to join together to offer defined contribution retirement plans
The new law facilitates the adoption of open multiple employer plans (MEPs) by allowing completely unrelated employers to participate in an MEP and eliminates the IRS's "one bad apple" rule, which stipulates that all employers participating in an MEP may face adverse tax consequences if one employer fails to satisfy the tax qualification rules for the MEP.
Roughly half of private-sector workers in the US still don't have access to a retirement plan through their employer. Open MEPs can help deliver low-cost, high-quality retirement plans for millions of small business workers.
You can withdraw up to $5,000 per parent penalty-free from your retirement plan upon the birth or adoption of a child
The new law permits an individual to take a "qualified birth or adoption distribution" of up to $5,000 from an applicable defined contribution plan, such as a 401(k) or an IRA.
The 10% early withdrawal penalty will not apply to these withdrawals, and you can repay them as a rollover contribution to an applicable eligible defined contribution plan or IRA.
There are other changes that could impact workplace retirement savings plans. The SECURE Act:
Encourages retirement saving by raising the cap for auto enrollment contributions in employer-sponsored retirement plans from 10% of pay to 15%. So, if your plan at work provides auto enrollment, the amount withheld for your retirement savings could go up every year until you're contributing 15% of your pay to your retirement savings plan.
Allows "lifetime income investment" to be distributed from your workplace retirement plan. The retirement income options would be portable. So, if you left your job, you could roll over this lifetime income investment to another 401(k) or IRA.
Increases transparency into retirement income with "lifetime income disclosure statements." These statements would show how much money you could potentially receive each month if your total 401(k) balance were used to purchase an annuity. This disclosure would allow you and your financial advisor to better gauge what your potential income would be throughout retirement.
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Work with Jeff and Landy to help clarify your personal and financial goals for both your retirement plan and your estate plan. Changes in the tax code, family relationships, and your own financial circumstances are common—requiring that you update your planning strategies every few years. Remember, your plans should evolve as you do.
References:
Fidelity [Website]. (n.d.). Retrieved January 2nd, 2020, from https://www.fidelity.com/learning-center/personal-finance/retirement/understanding-the-secure-act-and-retirement
Kreider, S. & Hoven, V. (2020). The SECURE Act – Last Minute Legislation Includes Pension and IRA Changes [Website]. Retrieved from https://www.westerncpe.com/blogs/etax-alerts/post/2020/01/01/secure-act/
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. We suggest that you discuss your specific tax issues with a qualified tax advisor.