What the SECURE Act Means for Taxpayers
The Act Addresses Some Outdated Provisions for Retirement Plans
The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law in December 2019 without a whole lot of fanfare. It covers some issues that have been targeted for reform for some time, but Congress never got around to tweaking them. That changed when the SECURE Act was incorporated into the more comprehensive Further Consolidated Appropriations Act in 2019.
The Act contains a few provisions that will hopefully make life a bit easier for both retirees and younger families.
Required Minimum Distributions From Retirement Plans
Older Americans have long been required to start taking required minimum distributions (RMDs) from their retirement plans at the age of 70½. “Required” is the keyword here—they had to begin withdrawing their money whether they needed it or not. These distributions represent the least they must take from their plans each year.
They could take more if they wanted, but they had to withdraw at least their RMD amount and add it to their taxable income.
The SECURE Act pushes this age back to 72. The age-70½ rule took effect in the 1960s and was never adjusted to accommodate the fact that Americans are living longer. The rule prevented older adults from passing the funds on to heirs without ever touching the money or paying taxes on it themselves.
That said, the SECURE Act includes some checks and balances. Some beneficiaries are now required to begin taking their own RMDs from inherited accounts within 10 years of the account holder’s death. It used to be that they could stretch the distributions out over their own life expectancies as a tax-deferral measure.
Provisions for Growing Families
Many retirement plan withdrawals have historically been subject to a 10% tax penalty when taken before the age of 59½, although some exceptions do exist depending on what you do with the money. The SECURE Act adds another exception: Parents who give birth to or who adopt a child can take up to $5,000 in the year following the event. The money is to be used for “qualifying birth or adoption expenses.”
The distributions are still subject to regular tax, but they can later be repaid to a retirement account.
Changes to 401(k) Plans
Part-time workers, defined as those who work less than 1,000 hours a year, have not traditionally been able to contribute to most 401(k) plans through their employers. The SECURE Act changes this. Employees must now work more than 1,000 in just one year to be able to contribute, or 500 hours a year for three consecutive years.
Plans that are part of a collective bargaining agreement are exceptions to this new rule, and employees must be age 21 or older.
IRA Contributions and Distributions
The SECURE Act eliminates the age limit for making contributions to traditional IRA plans. It used to be 70½. Account owners couldn’t contribute money to these plans any later than this, even if they had not yet retired. They can now contribute indefinitely.
This change was also prompted by the fact that Americans are working longer, but therein lies the catch. You must still be working to take advantage of it.
529 Plan Provisions
A 529 plan is a qualified tuition savings plan designed to help parents pay for higher education costs. The money invested grows tax-free provided that withdrawals are used to pay for education expenses. But as with all tax-advantaged savings plans, there are rules. Qualifying expenses didn’t include paying off student loan balances.
Taking withdrawals to repay student loans is now OK up to a limit of $10,000 under the terms of the SECURE Act. This helps parents whose dependents graduate leaving unused funds in the savings plans. The money would be taxed when withdrawn in this case.
The SECURE Act also allows 529 plan funds to be put toward apprenticeship programs, private elementary and secondary school costs, homeschooling, and religious schools.
On the downside, taking advantage of this option prevents taxpayers from also claiming a tax credit for interest paid on these loans, or at least the portion of them that the 529 plan paid off.
Proceed With Caution
These rules seem pretty basic, but you might not want to implement them into your tax plan or incorporate them into your tax returns without a little professional help and guidance. There are a few gray areas.
For example, what if you hit age 70½ in 2019 and you already began taking RMDs before the SECURE Act was signed into law? Should you stop taking them in 2020? That depends a great deal on your personal situation, so you should seek advice.
As for those traditional IRA contributions, the age-70½ year rule was still in place in 2019, but you should be able to begin making contributions again in 2020 if you stopped the year before.
Some of these rule changes impact estate planning as well, so you might want to consult a professional about how to best make them work for you based on your circumstances.
The SECURE Act is much more extensive than the provisions mentioned here. You can read the terms of the entire Act at the Congress.gov website.
Congress.gov. "H.R.1865—Further Consolidated Appropriations Act, 2020." Accessed Feb. 14, 2020.
Internal Revenue Service. “Retirement Topics—Required Minimum Distributions (RMDs).” Accessed Feb. 14, 2020.
House Committee on Ways and Means. "The Setting Every Community Up for Retirement Enhancement Act of 2019 (THE SECURE ACT)." Section 113. Page 3. Accessed Feb. 14, 2020.
Congress.gov. "H.R.1994—Setting Every Community Up for Retirement Enhancement Act of 2019." Section 113. Accessed Feb. 14, 2020.
House Committee on Ways and Means. “The Setting Every Community Up for Retirement Enhancement Act of 2019 (The SECURE Act)." Page 3. Section 111. Accessed Feb. 14, 2020.
House Committee on Ways and Means. "The Setting Every Community Up for Retirement Enhancement Act of 2019." Page 2. Sec. 106. Accessed Feb. 14, 2020.
U.S. Securities and Exchange Commission. "An Introduction to 529 Plans." Accessed Feb. 14, 2020.