The “Setting Every Community Up for Retirement Enhancement” (SECURE) Act was signed into law Dec. 20, 2019, to improve and encourage retirement saving for Americans nationwide. Like most pieces of federal legislation, it has many provisions—some positive, some negative—and a few unanswered questions.
We will continue to get updates and insights on the SECURE Act and its implications throughout 2020, but here is what we know so far. Below are a few ways in which the SECURE Act will affect individual retirement accounts (IRAs), retirement plans, and 529 plans.
1) Required minimum distributions (RMDs) will begin at age 72
Right now, RMDs for 401(k) plans and traditional IRAs begin at age 70½. Thanks to the SECURE Act, this milestone is getting bumped back to age 72. Not only does this make it easier to remember (who even keeps track of half birthdays?), it also lets your retirement savings grow for an extra year and a half before you have to start taking distributions.
This change takes effect for all individuals turning 70 ½ after Dec. 31, 2019. In other words—you are NOT required to take an RMD for 2020 if you turn 70 ½ in 2020.
Worth noting: This does not change the Qualified Charitable Distribution (QCD) age, which is still 70 ½. If you are turning 70 ½, you can still make a QCD for the year up to $100,000.
2) No maximum age for traditional IRA contributions
Previously, the maximum age for traditional IRA contributions was age 70 ½. Thanks to the SECURE Act, there is no longer an age limit on traditional IRA contributions. (Yippee!)
Since Americans are working later in life, this sets up a pretty interesting potential scenario. If you are still working at age 72, you might find yourself taking RMDs and making IRA contributions at the same time.
Roth IRA rules stay the same—there have never been age limits on Roth IRA contributions.
3) Stretch IRAs are eliminated
Stretch IRAs have played a key role in estate and tax planning because they allow non-spouse beneficiaries to “stretch” RMDs from inherited retirement accounts over their lifetimes. You might ask—why not take all the money out at once? Keeping the money in the retirement account would allow it to grow tax-free for decades. And who doesn’t like that idea?
The government, apparently. Under the SECURE Act, stretch IRAs are eliminated for account owners who die on or after Jan. 1, 2020. For those inherited accounts already using a lifetime distribution or five-year payout, the payout structure should remain the same.
In 2020 and beyond, all inherited IRA funds must be distributed to a non-spouse beneficiary within 10 years. Of course, there are a few exceptions to the rule—this is Washington, D.C. legislation we are talking about, after all!
Possible exceptions include:
- Surviving spouse
- Disabled beneficiary
- Chronically ill individual
- Beneficiary is less than 10 years younger than deceased account owner
- Owner’s minor child
These exceptions should be evaluated on a case-by-case basis. If you think you might fall into one of these categories, you should meet with a financial planner to make sure. If a trust, charity, or estate has been named the beneficiary of an IRA, you should also consult with a financial planner (and possibly an estate attorney).
4) Limited 529 plan funds can be used to pay student loan debt
Under the SECURE Act, individuals can dip into 529 plan assets to use a lifetime amount of $10,000 to pay student loans, along with a lifetime amount of $10,000 for each sibling of the beneficiary. It also expands the definition of qualified education expenses to include costs associated with homeschooling and registered apprenticeships.
Just remember, every dollar you withdraw from a 529 plan today is sacrificing thousands of dollars that would have accrued in your 529 plan over the span of decades, thanks to compound interest.
5) New IRA contribution rules for grad students and care providers
How do you make retirement contributions if you don’t earn income? Historically, you don’t. In the past, this made retirement saving near impossible for graduate and postdoctoral students who receive stipends, along with caregivers who receive “difficulty of care payments,” both of which are not treated as compensation for tax purposes.
Under the SECURE Act, these payments will be considered income for retirement planning purposes. This will allow students to use fellowship money and other academic stipends to make IRA contributions, and allow care providers to use “difficulty of care payments” to make 401(k) and IRA contributions.
6) No more 401(k) loans using a credit or debit card
The SECURE Act bans convenient access to 401(k) loans using a credit card or debit card. This new restriction makes it harder for borrowers to use retirement funds to make routine purchases, and for good reason. The government does not want you using a 401(k) like a credit card at the expense of your retirement, and frankly, neither does your financial advisor.
7) Penalty-free early withdrawals for new parents
If you recently gave birth or adopted a child, the SECURE Act gives each spouse one year to withdraw up to $5,000 from your retirement account without facing the usual 10 percent penalty for early withdrawals. You can pay this back at a later date, although don’t count on it—kids are expensive.
File this option under the adage: just because you can do it, doesn’t mean you should do it. The greatest superpower you have as an investor is time. Withdrawing funds in your 30s and 40s will cost you decades of compound interest growing your money tax-free in your retirement accounts.
It may not seem like much right now, but consider this: $5,000 compounding annually at 8 percent interest over 40 years will grow to exceed $108,000. Now those are some expensive diapers.
Meet with a New Jersey Financial Planner
There are many other provisions to this new law—this is by no means an exhaustive list. If you have questions about how the SECURE Act will impact your long-term financial plan and retirement strategy, make an appointment with Bodnar Financial today.