What the SECURE Act Means
In December 2019, Congress passed a bill whose impact on some aspects of retirement plans and savings is significant. The bill, the Setting Every Community Up for Retirement Enhancement (SECURE) Act, could affect the retirement, inheritance, educational savings and family plans of pre-retirees, business owners and healthcare professionals. Many provisions in the SECURE Act went into effect on January 1, 2020.
At The Normandy Group, we specialize in financial and retirement planning. Let us help you navigate the changes the SECURE Act may mean for your savings and retirement plans. Below are the key provisions in the SECURE Act of which pre-retirees, business owners and healthcare professionals should be aware:
Required Minimum Distributions Now Begin at 72 Rather Than 70½
In the past, holders of retirement funds in defined contribution plans such as 401(k)s and in traditional IRAs had to begin required minimum distributions (RMDs) from those accounts at the age of 70½ or face significant tax penalties. (Holders of these retirement accounts can begin taking withdrawals without penalty at the age of 59 1/2, but RMDs at 70½ were mandated.)
Under the SECURE Act, though, RMDs don’t need to begin until account holders turn 72. This change is designed to reflect increased life expectancy. Many observers point out that the new rule could have the beneficial effect of prolonging retirement savings.
This new provision applies only to people who will become 70½ on or after January 1, 2020. If you turned 70½ last year, the rule of beginning RMDs at 70½ still applies. If you are currently receiving RMDs because you are more than 70½, they need to continue. (In other words, you can’t delay them under the new rule.)
There Are No Longer Age Restrictions on Contributing to Traditional IRAs
In past years, people were not allowed to contribute to traditional IRAs once they became 70½. It went into effect the year in which you reached that age, so if you turned 70½ in 2018, you were not eligible to contribute to a traditional IRA in 2018 or 2019.
Beginning in 2020, however, folks who are 70½ or older can contribute to traditional IRAs, due to the SECURE Act, as long as they have earned income to contribute.
Note that the new provision applies to everyone who works and earns income, but not retroactively. If you were 70½ in 2019, you cannot make a traditional IRA contribution for that year, because the old rules apply in 2019. (That includes any contribution made up until April 15, 2020, for the 2019 tax year.) But under the SECURE Act, you gain the ability to contribute for 2020, and for as long as you want beyond that, no matter what your age.
Note that there has never been any age limit on Roth IRA contributions – you can contribute to them at any age – and that continues to be the case.
The Period in Which Inherited Retirement Account Distributions Can Be Taken Has Been Curtailed for Some Beneficiaries
People who were not spouses who inherited IRAs were allowed to take the RMDs from those inherited IRAs over the course of their life expectancy, as defined by the Internal Revenue Service (IRS). So if you inherited an IRA at the age of 35, for example, and the IRS indicated your life expectancy was 78, you could take distributions over a 43-year period. This was referred to as the “stretch” strategy. It was advantageous because the inherited funds could grow tax-deferred/tax-free potentially for years.
However, the ability to “stretch” a non-spousal inherited IRA has been eliminated under the SECURE Act. Once the account owner dies, all distributions to individual beneficiaries who are not spouses have to be made within a decade. This new rule also covers inherited funds in defined contribution plans such as a 401(k).
The SECURE Act did leave some exceptions to this new rule. Eligible beneficiaries will be able to take their RMDs from an inherited IRA account over their life expectancy as defined by the IRS, just as they did before the SECURE Act. Eligible beneficiaries can be surviving spouses, a minor child of the deceased, a beneficiary who is not more than 10 years younger than the deceased or a disabled or chronically ill person named as beneficiary. The stretch strategy will still work for these people. Their life expectancy for RMDs is calculated as of the year following the year in which the account owner died.
If you inherited IRAs in the past, the stretch rules continue. The SECURE Act rule comes into effect only for beneficiaries of individuals who die after 12/31/2019.
While many of the SECURE Act’s provisions are positive from a taxpayer’s standpoint, the elimination of the stretch strategy for some beneficiaries is primarily being done to garner more taxes for the government’s coffers.
529 Savings Plan Distributions Can Now Be Used for Student Loan Debt
If you participate in a 529 educational savings plan, the SECURE Act will now let up to $10,000 in distributions from these plans to be used for payment for qualified student loans and expenses for certain apprenticeship programs.
This new rule is retroactive to December 31, 2018.
To some degree, this new provision addresses one of 529 plan participants’ most often-cited worries: that they could have 529 funds left over after their child or grandchild completes their education. It also addresses the increasingly pressing issue of rising student loan debt.
Adoption/Birth Expenses Can Be Withdrawn from Retirement Plans Without Penalty
For people interested in giving birth to or adopting a child, the SECURE Act has made it possible to withdraw money from retirement plans without paying the 10 percent early withdrawal penalty. Each individual with an eligible defined contribution retirement plan or IRA can withdraw a “qualified birth or adoption distribution” of as much as $5,000.
If both people in a couple have an individual eligible retirement account, they can each take $5,000, for a total of $10,000.
Retirement and other planning can be complicated. It’s prudent to consult a Normandy Group advisor on these aspects of the SECURE Act to make sure you are benefiting from its provisions.