The Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed in December 2019 as part of the overall spending bill and it became effective almost immediately on January 1, 2020.  The SECURE Act has many components, but this article will focus on the six changes that are most relevant to the average person.

• Required Minimum Distributions (RMDs)

The law extended the age at which retirement account owners must start taking distributions from their tax-deferred retirement accounts (IRA, 401k, 403b, TSP) from 70½ to age 72.  However, this only applies to people who will turn 70½ after January 1, 2020.  That is, anyone born July 1, 1949 or later, will not need to start RMDs until the year in which they turn age 72.

Anyone who has already starting taking RMDs because they turned 70 ½ in 2019 or earlier must continue to take the distributions under the old rules.  

You can find more information about RMDs in a previous blog post here.

Note that the law did not change the eligibility age for Qualified Charitable Contributions, which still begins at age 70½.  This was covered in a previous blog post here.

• IRA contributions

The SECURE Act removes the age limit at which an individual can contribute to a Traditional IRA. Under the old rules, a person could not contribute to an IRA after age 70½, even if they were still working.  Under the new rules, any person that is working and has earned income can contribute to a Traditional IRA, regardless of age.  Keep in mind, whether or not the contribution is deductible still depends on certain income limits.

• Inherited IRAs (also known as Beneficiary IRAs or Stretch IRAs)

For any non-spouse beneficiary that inherits an IRA from someone who passes away after January 1, 2020, the beneficiary will no longer have the option to stretch out this distribution, and the accompanying taxes, over their lifetime.  This is sometimes referred to as a “Stretch IRA.”  Instead, the new law requires the beneficiary to withdraw the entire account, and pay taxes on the entire amount, within ten years of the IRA owner’s date of death.  This new rule does not apply to spousal beneficiaries. It also does not apply to beneficiaries that are minor children or disabled.  

One of our colleagues created this simple calculator to show beneficiaries a comparison of inherited IRA distributions before and after the SECURE Act.

Regarding the exemption for disabled beneficiaries, the law has not given specifics about how disability is defined.  It refers to IRS section 72(m)(7) which states:

“…an individual shall be considered to be disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration. An individual shall not be considered to be disabled unless he furnishes proof of the existence thereof in such form and manner as the Secretary may require.”

• Waiver of early withdrawal penalty after birth or adoption of child

Upon the birth or adoption of a child, parents may now withdraw up to $5000 from their retirement plans without incurring the 10% tax penalty for early withdrawal.  The distribution would still be subject to Federal and State ordinary income tax.

• 529 Plan withdrawals to pay student loans

The SECURE Act expanded the definition of qualified higher education expenses to include student loan payments and costs of apprenticeship programs.  The withdrawal for student loan debt repayment is capped at $10,000 per beneficiary. Any interest paid by the tax-free 529 distribution may not also be claimed as a student loan interest deduction.

• 401(k) available to more part-time employees

Part of the law makes it easier for employers to offer 401(k) plans to employees that work part-time.  The previous rules had employers make their plans available to employees once they worked 1,000 hours in any calendar year. The new law reduces that to 500 hours.

As always, you should work closely with your tax advisor and financial advisor to see how these changes affect your personal situation and to see if your retirement plan should be adjusted.