Although it didn’t receive quite as much fanfare as the Tax Cuts and Jobs Act (TCJA) of 2017, the Setting Every Community Up for Retirement Act—better known as the SECURE Act—does contain some noteworthy changes that we want you to be aware of. Most of these changes created by the law, which was signed on 12/20/2019, took effect on the 1st of this year.
While the Act contains many more provisions, below are the ones we think are most important for you to know about.
Changes Related to IRAs
Elimination of the Stretch Provision – Under the old law, IRA beneficiaries of deceased account owners could “stretch” the distributions they took from the inherited IRA over their remaining life expectancy. This was a nice way for beneficiaries to spread out the tax impact of making withdrawals from these (usually large) IRAs. Under the new law, most beneficiaries will have to fully empty the inherited retirement account by the end of the 10th year following the year of inheritance. It’s important to note that spousal beneficiaries (as well as a few other, less common, beneficiaries) are not subject to the new 10-Year rule.
This is easily the biggest change made by the law, and unfortunately, it’s a negative one. But the new benefits had to be paid for somehow!
Increased Age for Required Minimum Distributions (RMDs) – Going forward, RMDs will now begin at age 72, rather than the previous (and much more confusing) age requirement of 70 ½. This is a win for account owners who would rather not begin making withdrawals from their IRAs but are forced to by the RMD requirement. This change only affects account owners who will turn 70 ½ in 2020 or later. In other words, if your RMD requirement was triggered last year, or if you have already been taking RMDs, the old rules apply to you.
No Age Limit for Making IRA Contributions – Previously, you could not make contributions to a Traditional IRA after turning 70 ½. That restriction has been lifted, and now as long as you have earned income, you can contribute. This is good news for folks who continue to work into their seventies.
Up to $5,000 of Qualified Distributions for Birth or Adoption Expenses – The 10% penalty on early distributions from an IRA has been lifted on withdrawals of up to $5,000 that are used to pay for birth or adoption expenses. Notably, this $5,000 is per person. So, two spouses could each withdraw up to $5,000 to pay costs for one birth or adoption expense.
Changes Related to 401(k)s
Tax Credits for Small Businesses – The tax credit offered to small businesses that establish a retirement plan has been increased from $500 to as much as $5,000, with that amount being mostly dependent upon the number of non-highly-compensated employees eligible to participate in the plan. A new credit of an additional $500 is available for small businesses that adopt an auto-enrollment arrangement in their plan.
Multiple-Employer Retirement Plans – These types of plans, which allow for multiple employers to band together under one retirement plan to save on costs aren’t new, they’ve been around. But the SECURE act makes it much easier for small business to form these kinds of plans.
Part-Time Employees Now Eligible – Previously, most part-time workers were excluded from being able to participate in their company’s 401(k) plan. Now, if part-time employees have worked at least 500 hours in three consecutive years, they’re eligible to participate. Unfortunately, these changes apply to plan years beginning in 2021, so with the requirement of three consecutive years of 500 hours, it could be as late as 2024 before part-time employees can actually begin participating.
One Other Important Change
529 Eligible Expenses Broadened (Again) – Most of you should know that the definition of ‘qualified education expenses’ which 529 funds can be used to pay for was extended under TCJA to include private school K-12 tuition expenses. Well, the SECURE Act extends that definition even further. 529 funds can now be used to pay for registered apprenticeship programs as well as paying for student loans, but only up to a lifetime maximum of $10,000.