The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law December 2019 without much fanfare. It covers some issues that have been targeted for reform for some time, but Congress never got around to reviewing 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 could make life a bit easier for 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 70 1/2. “Required” is the keyword here; they have 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 70 1/2 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.
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 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 been subject to a 10% tax penalty when taken before the age of 59 1/2, 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 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 be repaid to a retirement account later.
Changes to 401(k) Plans
Part-time workers, defined as those who work fewer 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 eliminated the age limit for making contributions to traditional IRA plans, which used to be 70 1/2. 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. In these cases, the money would be taxed when withdrawn.
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.
The Bottom Line
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 70 1/2 in 2019, and you already began taking RMDs before the SECURE Act was signed into law? Should you stop taking them going forward? That depends a great deal on your personal situation, so you should seek advice.
Some of these rule changes impact estate planning as well, so you might want to consult a professional about how to make them work best for you, based on your circumstances.