The Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act) is the first major legislative change to retirement rules in more than 10 years. It includes changes to both how you can save for retirement and how you can access those funds.
Here are 6 key areas affected by the SECURE Act.
1. Raises the RMD age to 72
The SECURE Act raises the age of required minimum distributions (RMDs) from 70½ to 72. While it may seem like a small change, it can have a big impact, says Joni Meilahn, vice president and product manager at U.S. Bancorp Investments.
“Being able to wait and delay the RMD gives you more time to adjust to what your work and tax situation might be, retire a little bit later, and potentially be in a lower tax bracket when that taxable distribution is required,” she says.
This provision has introduced some confusion for people who turned 71 this year and took an RMD last year, says Wendy Kelley, vice president and national IRA product manager at U.S. Bank Wealth Management.
“If you turned 70½ last year, you have to continue taking minimum distributions even though you’re turning 71 this year,” she adds.
The SECURE Act includes changes to both how you can save for retirement and how you can access those funds.
2. Increases the IRA contribution age limit
Under the old rules, IRA owners had to stop contributing to an IRA once they reached age 70½ even if they were still working. Under the SECURE Act, anyone can contribute to a traditional IRA as long as they’re earning compensation.
“If you’re still working and you’re over 70½, you can keep contributing if you have compensation,” says Kelley. One caveat: IRA contributions only apply to earned income. Passive income isn’t eligible.
3. Eliminates the stretch IRA
Before the SECURE Act, a person who inherited an IRA could “stretch out” RMDs from an IRA over their lifetime, letting those funds grow tax-deferred. This is known as a “stretch IRA.”
Stretch IRAs have been a popular estate planning strategy for families that wanted to leave their beneficiaries a source of income, says R. Duane Richardson, vice president and director of community wealth planning at U.S. Bank Wealth Management. If a person puts their IRA into a trust, their beneficiaries would receive their share of the RMD while allowing the IRA balance to grow tax-deferred.
The SECURE Act has effectively ended this strategy. Under the new rules, most non-spouse beneficiaries of inherited IRAs must withdraw the balance within 10 years and pay taxes on it. “It’s such a sweeping change that I think families who incorporated stretch IRAs into their estate plan should consider reviewing their plans with their financial team,” says Richardson.
The good news is that those who inherited an IRA before the SECURE Act took effect are grandfathered in and may continue to stretch out their RMDs.
4. Allows you to use a 529 plan to pay student loans
Another change that went into effect with the SECURE Act affects student loan debt. Americans now have the option to repay up to $10,000 a year in qualified student loans using funds in 529 savings accounts.
“It really just increases your options on how to use 529 plan assets,” says Richardson. He adds that while there may be a slight tax advantage to putting money into a 529 for the express purpose of paying down debt in states that allow a deduction for 529s, he recommends consulting a tax advisor to find out for sure.
5. Lets you withdraw up to $5k from 401(k)s penalty-free for having or adopting a child
Under the SECURE Act, parents are now able to withdraw as much as $5,000 from their 401k to help cover the costs of having or adopting a child without having to pay the normal 10 percent penalty.
However, Richardson warns it could cost families down the road. “It’s kind of a two-edged sword,” he says. “It’s a nice way for families to be able to access those dollars at a time of need; on the other hand, those are really retirement accounts. If you compound that tax-deferred over the next 25 to 30 years, in some cases, that’s going to be a big difference in your retirement balance.”
6. Makes it easier for small business retirement plans
The SECURE Act allows small businesses to band together to offer multiple-employer plans (MEPs), provides new tax credits for setting up plans, and simplifies some rules. It also allows part-time employees who worked at least 500 hours a year over the past three years to join employer-sponsored retirement plans.
“Many provisions [of the SECURE Act] are intended to encourage employers to establish plans to cover employees so we have more people in America with better retirement balances,” says Kelley. “It’s trying to help them defray costs and cover participants in qualified plans.”