On December 20, Congress signed the first major retirement legislation since the Pension Protection Act of 2006. The “Setting Every Community Up for Retirement Enhancement,” or SECURE Act, was passed as part of a broader effort to avoid a government shutdown.
The new legislation is aimed at expanding Americans’ access to employer-sponsored retirement plans and help their savings last longer through retirement.
Increase in age for beginning RMD
With the previous legislation, individuals had to start taking required minimum distributions from their retirement account when they turned 70½. The SECURE Act increased the minimum RMD age to 72, helping account holders’ money last longer in retirement.
Note: This rule applies to people who turn 70½ after December 31, 2019. Anyone who turned 70½ before then will still need to start taking required minimum distributions.
Traditional IRA contributions can continue after age 70½
Previously, account holders older than 70½ were prohibited from contributing to their traditional IRA, even if they were still working. The new retirement law applies the same contribution rules for 401(k) plans and Roth IRAs to traditional IRAs, which is that people can continue to contribute to their account as long as they’re still working. This rule was enacted based on increased life expectancies and the trend for people to continue working later in life to help fund retirement.
New rules for inherited retirement accounts
Under the old legislation, the non-spouse beneficiary of an inherited retirement account (also known as “Stretch IRA”) could choose to take distributions over the course of their lifetime and then pass what is left onto future generations. This allowed the beneficiary to grow the money tax-deferred over the course of their lifetime.
With the SECURE Act, non-spouse beneficiaries must now withdraw all the funds from the IRA within 10 years of the account holder’s death. This has major tax implications for inheritors of IRA accounts, and could alter estate planning for many IRA holders.
This provision has exceptions for spouses, minors, disabled individuals and people less than 10 years younger than the account holder. It will only apply to those who inherited IRAs on or after January 1, 2020.
Penalty-free withdrawals for birth/adoption expenses
In general, withdrawals from retirement accounts prior to age 59½ are subject to a 10% early distribution tax, in addition to regular income tax. The SECURE Act adds a new exception to this rule with a “qualified birth or adoption distribution” (QBOAD).
Employees can take a QBOAD of up to $5,000 penalty-free during the one-year period after the date of a child’s birth or adoption. This applies to each parent, meaning a couple could take out up to $10,000 from their retirement savings (as long as they both have separate accounts in their own names).
Part-time workers can participate in a 401(k) plan
Previously, employers were able to exclude part-time workers from 401(k) plan participation. With the new 401(k) legislation, employees who have worked either 1,000 hours in one year (roughly 20 hours per week) or 500 hours of service each year for three consecutive years, will be able to participate in retirement plans.
Makes it easier for annuities to be offered in 401(k) plans
Currently, only about 10% of retirement plans offer annuities. This might change due to the SECURE Act, which eases annuity provider rules for employers offering a 401(k) plan. The addition of annuities could help investors to secure a guaranteed stream of income in their retirement years.
Change to 529 plan withdrawal amount
A 529 savings plan is used specifically to save up for college expenses. The new legislation now allows families to withdraw up to $10,000 from each student’s 529 plan to repay student loans.
Makes it easier for small businesses to offer retirement plans
There are several provisions in the SECURE Act that incentivize small businesses to offer retirement plans. One such amendment is an annual tax credit that covers up to $5,000 of plan costs for the first three years that an employer offers a retirement plan. Another feature of the Act is to allow unrelated small businesses to band together in “open” 401(k) multiple-employer plans (MEPs), reducing the costs and administrative duties for employers.
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