The SECURE Act is Changing Retirement

Vincent Scarsella

The start of this New Year brings changes to how we handle retirement savings. Just before Christmas, Congress passed a massive spending bill, which was signed into law. Included in this bill was a bipartisan retirement bill called the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Most provisions of the law became effective starting January 1, 2020. We’ve included some key takeaways that may affect you. If you have concerns or questions, we’d be happy to help you. Please reach out to your financial advisor for assistance.

Inherited IRAs (Stretch IRA’s)

For anyone who inherited an IRA from an original IRA owner who passed away prior to January 1, 2020, no changes to your current distribution schedule are required. However, for situations where the original IRA account owner passes away after December 31, 2019, fewer beneficiaries will be able to extend distributions from the inherited IRA over their lifetime. Many will instead need to withdraw all assets from the inherited IRA within 10 years following the death of the original account holder. Designated beneficiaries will have some flexibility when it comes to timing distributions from the inherited account for maximum tax efficiency. As long as the entire account balance has been taken by the end of the 10th year after death. Exceptions to the 10-year distribution requirement include assets left to a surviving spouse, a minor child, a disabled or chronically ill individual, and beneficiaries who are less than 10 years younger than the decedent.

RMD Change

The Act states that the beginning RMD age is shifted to age 72 for those who reach the age of 70½ starting in year 2020. This would mean that those reaching age 70½ in 2019 would need to continue to take RMDs in 2020. Mirroring current law, individuals upon reaching the requisite age (now age 72 instead of 70 ½) will still be able to delay their first RMD until April 1 of the year following the year for which they must take their first RMD (the required beginning date). Thus, an individual turning 72 on February 2, 2021 can take their first RMD until as late as April 1, 2022. However, if the first RMD is not taken in the year an individual turns 72, but is instead taken the following year (by April 1), a second RMD will also still need to be distributed that year (the year the individual turns 73) by the end of the year. But either way, the first age-72 RMD will always be calculated using the age 72 life expectancy factor.

Contribution Rules for Traditional IRAs

The law removes the age limit at which an individual can contribute to a traditional IRA. Today, an individual cannot contribute after age 70½; the Act allows anyone that is working and has earned income to contribute to a traditional IRA regardless of age.

Qualified Birth or Adoption Distribution

Upon the birth or adoption of a child, the law permits an individual to take a “qualified birth or adoption distribution” of up to $5,000 from an applicable eligible defined contribution plan or IRA. This distribution is not subject to the 10% early withdrawal penalty.

529 Plans

The law expands the definition of a tax-free or qualified distribution from a 529 savings plan to include repayment of up to $10,000 in qualified student loans, and expenses for certain apprenticeship programs.

401K Plans

Under current law, employers can generally exclude employees from participating in a 401(k) if they have not worked at least 1,000 in a single plan year. The SECURE Act attempts to mitigate this issue by creating a ‘dual entitlement’ system for most employer retirement plans, in which the ‘old’ 1,000-hour rule still applies, but where employees must also be eligible to participate in the plan if they have worked at least 500 hours in at least three consecutive years. Thus, individuals must be eligible to participate in an employer plan upon completing either requirement. These changes apply to plan years beginning in 2021, thus, the earliest a part-time employee would be eligible to participate in a 401(k) plan as a result of this change will be in 2024.

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