The SECURE Act
Updated: Aug 4
The SECURE Act (Setting Every Community Up for Retirement Enhancement Act of 2019) was signed into law on December 20th, 2019. This marks the second tax or retirement reform in the past two years. Typically major changes, like these, are seen only once a decade, if at all.
Although the SECURE Act has been quieter than The Tax Cuts and Jobs Act of 2017, there are a few very important changes that potentially will affect millions of Americans. For the most part, all changes take place starting January 1st, 2020. The major changes include required minimum distributions, IRA contribution age, Stretch IRAs (for IRA beneficiaries), and 529 college savings plans.
Required Minimum Distributions (RMD): For individuals who, as of 12/31/2019, have not yet reached the age of 70 1/2, RMDs will be pushed back until the year in which they turn 72. In other words, individuals turning 70 1/2 after 12/31/2019 can delay their RMD until age 72. For all current or new RMDs in 2019, it is business as usual as this legislation will not have any affect on your RMD.
IRA Contribution Age: The age in which you can contribute to an IRA was previously 70 1/2. Under the new law, this age restriction has been eliminated. Individuals over 70 1/2 can now make IRA contributions as long as there is earned income to contribute.
Stretch IRAs: This applies to only non-spouse beneficiaries of inherited IRAs and other retirement accounts. Non-spouse beneficiaries who inherited IRAs or retirement accounts after 12/31/2019 will have to completely liquidate the account within 10 years. However, there is some flexibility as beneficiaries can distribute any amount or none at all within any given year. All the IRS is concerned about is that the account is 100% distributed within 10 years. Previously beneficiaries had the option to stretch distributions out over their own life expectancy (hence the name Stretch IRA). Again, this is for inherited accounts after 12/31/2019 and does not apply for any current Stretch IRAs.
529 College Savings Plans: Once again, 529 College Savings Plans have expanded qualified distributions to now include up to $10,000 towards qualified education student loan repayments. That $10,000 is a lifetime amount per beneficiary with an additional $10,000 per beneficiary’s siblings. Individuals who make qualified student loan repayment distributions may not also be eligible to receive the student loan interest deduction (maximum tax deduction of $2,500). In the state of Indiana, account owners may qualify to receive a 20% tax credit for contributions put into 529 accounts (up to a maximum credit of $1,000 annually).
There are other minor changes with the SECURE Act to help solve / deal with the retirement savings crisis. Some of those changes include: potential tax credits for small businesses starting a 401k, guaranteed lifetime income options within a retirement account, new exceptions to the 10% early withdrawal penalty for adoption and childbirth, and some part time workers becoming eligible to participate in employer retirement plans, among others. With over 75% of Americans under the age of 70 and an aging population, these changes will alter future strategies for millions of Americans. The ultimate goal is to bolster Americans’ retirement savings, which would in turn increase the likelihood of a successful retirement.
Please contact me with any questions or for more information on how these changes may affect you.
Evan Werckenthien, CFP©
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Source: Experian, Federal Reserve