How the SECURE Act Affects Your Retirement Plan
February 24, 2020
The SECURE Act, signed into law December 20, 2019, is the first overhaul of retirement savings plans in over a decade. The Setting Every Community Up for Retirement Enhancement (SECURE) Act primarily improves on requirements for retirement investments like IRAs. However, many people need to adjust their retirement plans because of the new rules.
U.S. Government Accountability Office statistics show 48% of households headed by someone age 55 and over have no retirement savings. The SECURE Act of 2019 makes investing in tax-advantaged retirement accounts more appealing while preventing retirees from outliving their savings. Understand the new rules to determine if you should reevaluate your retirement plans.
The SECURE Act and Your IRA
The SECURE Act introduced five changes that can impact your individual retirement account. Two changes are based on age, one redefines earned income and another defrays the cost of childbirth or adoption. The remaining change does away with stretch IRAs passed down from one generation to another.
- Required Minimum Distributions
The age for taking RMDs increased from 70½ to age 72. The first investors affected are those who turn 70½ on or after January 1, 2020. This rule allows you to grow your retirement account for 18 additional months. The new law is beneficial for many Americans who are retiring later.
If you planned to start taking an RMD in 2020 at the age of 70½, you might need to reconsider. Meet with a tax advisor to learn your options.
- No Age Limit on IRA Contributions
The SECURE Act removes the former age restriction, which disallowed contributions to a traditional IRA after age 70½. As long as you are working, you can contribute to a traditional IRA or Gold IRA regardless of your age. This rule can increase your retirement income substantially if you prefer to work longer.
If you turned 70½ in 2019 and did not take 2019 RMDs, you must take distributions by April 1, 2020. This rule doesn’t apply to Roth IRAs, which have never capped contributions based on age.
- Inheriting Retirement Accounts
IRAs inherited by a relative other than a spouse are called stretch IRAs. These IRAs could be passed on through inheritance over decades to take advantage of tax-deferred or tax-free growth. The SECURE Act does away with stretch IRAs. All funds from an inherited IRA must be distributed within 10 years of the original owner’s death.
Exceptions to the rule apply if the beneficiary is disabled, chronically ill or 10 or fewer years younger than the deceased. These beneficiaries must take distributions over their life. Minor children must take distributions 10 years after they reach the age of majority (18 in most states).
- Withdrawal Provision for Adoption or Birth
The SECURE Act allows a parent to withdraw $5,000 from an IRA to cover the cost of birth or adoption. Married parents with separate IRAs can each withdraw $5,000, and there’s no early-withdrawal penalty. Taxes are still due on the distribution unless paid back. Amounts paid back into the account are treated as rollovers and not included in taxable income.
- New Earned Income Definitions for Students and Foster Care Providers
The SECURE Act expanded the definition of earned income for graduate or postdoctoral students. These individuals can include taxable fellowships or grants used for higher education costs in their earned income. The same rule applies to foster care providers who receive difficulty-of-care payments. This rule allows these individuals to make deductible contributions to a traditional IRA.
Changes to 401(k) Accounts
The SECURE Act also changes some rules for employer-sponsored 401(k) plans. The act added annuities, benefits for part-time employees, increased limit on contributions and other enhancements.
- Part-time employees are now eligible for 401(k)s. Work at least 500 hours per year for three consecutive years to qualify. The employee must be 21 years old by the end of this period. The rule does not apply to collectively bargained employees.
- The adoption or birth rule applies to 401(k)s, allowing up to $10,000 in withdrawals without penalties. You can read details about this rule above in the IRA section.
- 401(k) plans can offer annuities for lifetime income streams. Annuities will appear more often in 401(k) options. Employees can rollover the annuity to another 401(k) or IRA if they change employers. No surrender charges or other fees are due.
- Plan participants receive an annual lifetime income disclosure statement. These statements explain monthly payments you would receive if you chose to buy an annuity with your 401(k) balance.
- Increased Qualified Automatic Contribution Arrangements (QACA). Many employers automatically enroll employees in 401(k) plans with a QACA. The arrangement gradually increases the employee’s contribution rate. The employee can opt-out of the 401(k) or change the contribution rate. The new QACA cap is 15% of the employee’s income, which is a 5% increase.
Other SECURE Act Changes
Proceeds from a tax-free 529 savings plan distribution can now repay up to $10,000 in qualified student loans. The funds may also be used to pay for some apprenticeship programs. This change is retroactive to distributions made on or after January 1, 2019.
The SECURE Act also gives tax credits to help small businesses offer employees retirement savings plans. Credit or debit cards used to take out loans from 401(k) plans are no longer allowed to discourage borrowing.
The SECURE Act provides many new rules to make growing retirement savings easier. However, some provisions of the act require investors to rethink their retirement plans. Those who planned to gift an IRA to an individual or charity should meet with a financial professional. Some will need to determine if they must amend their will, trust or other arrangements.