On December 20, 2019, the Setting Every Community up for Retirement Enhancement (SECURE) Act of 2019. Effective January 1, 2020 was signed into law. The SECURE Act addresses provisions that work to reform workplace retirement plans and helps expand retirement savings.
You may have heard of the SECURE Act, though many investors I speak with do not know what it addresses or what provisions are included. While the SECURE Act touches many small business and individual issues, this article will highlight what I feel are the most notable individual legislative changes and the act’s meaning as it may apply to you.
The required minimum distribution (RMD) and contributions age was raised. An RMD withdrawal previously generally needed to be taken the year in which you turn 70½. Now, the age has increased to age 72 years old. For a beneficiary who is the IRA owner’s spouse, RMDs are delayed until the end of the year that the deceased IRA owner would have reached age 72. Another major change is that IRA contributions have been extended beyond 70½ as long as the taxpayer is working. While the age to begin RMDs has been increased to 72, taxpayers can still make Qualified Charitable Distributions (QCDs) from their IRA as early as 70½. QCDs are not taxable given the $100,000 limit per year and the distributions must be made directly to the charity.
“Stretch IRA” was eliminated. Previously the “stretch IRA” allowed IRA beneficiaries to stretch their distributions and the accompanying required income tax payments based on their life expectancy. Under the SECURE Act, beneficiaries must withdraw all assets from an inherited IRA within ten years. While there are no minimum distribution amounts, the entire balance must be distributed after the tenth year. There are some EXCEPTIONS if the beneficiary is a minor, disabled, chronically ill or not more than ten years younger than the deceased IRA owner. For minors, the exception only applies until the child reaches the majority age, at which point the ten-year distribution rule applies.
Added exceptions for penalty-free withdrawals. The SECURE Act allows for withdrawals without penalty from a 401(k), IRA or other retirement account prior to age 59½ for childbirth and adoption costs. Withdrawals of up to $5,000 per person will be allowed without paying the usual 10% early withdrawal penalty. An example of this would be a husband and wife can each withdraw $5,000 from their respective retirement accounts. Please note that parents will have one year from the date the child is born, or adoption is finalized, to withdraw the funds from their retirement account to avoid paying the 10% penalty. These withdrawals will still be taxable as income.
Care providers and graduate students will be allowed to contribute to IRAs. Under the SECURE Act, the amount paid to care providers, graduate, post-doctoral and research will be treated as compensation for purposes of making IRA contributions. This is important to these groups as retirement account contributions couldn’t exceed earned income. Those who receive stipends previously weren’t allowed to contribute. Foster-care provider payments received for the care of disabled people in their home also previously didn’t qualify.
401(k) Plan Investment Option Changes. The Secure Act permits employers to offer annuities within 401(k) plans as investment options. The annuities issued by the insurance companies will have a fiduciary responsibility to offer suitable options to participants. The employers will be protected from legal action. The SECURE Act requires 401(k) plan administrators to provide “lifetime income disclosure statements” annually to plan participants.
Employer-sponsored retirement plan changes. The SECURE Act provides an avenue for small businesses to band together to offer Multiple Employer Plans (MEPs). The Act also allows the availability for long-time part-time workers to participate in the employer-sponsored plan. The act lowers the threshold for eligibility down to either three consecutive years of working at least 500 hours or one full year of 1000 hours worked. Employers will get a tax credit helping to offset the 401(k) start-up costs or SIMPLE IRA plans with the “auto-enrollment” feature.
401(k) Loan Rules. The SECURE Act allows loans as much as 50% of your 401(k) balance, without exceeding $50,000, with a five-year repayment schedule. If your loan is to buy a home, the repayment schedule may be longer.
529 Plan Expenses Expansion. 529 education saving plans must be used for qualified educational expenses. The SECURE Act broadens the qualified expenses to include student loan payments and apprenticeship program costs up to $10,000.
If you need help making sense how the SECURE Act may apply to you or have any other questions, email JAMES.KNAPP@KNAPPADVISORY.COM. We are here to help.
James C. Knapp, AIF®, BFA™, CPFA®
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC
This information is not intended to be a substitute for specific tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.