The NEW SECURE Act and You

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which went into effect this year, created significant changes to retirement savings rules. From later required minimum distributions (RMDs) to IRAs and 401(k)s to accelerated distributions of inherited IRAs, the SECURE Act affects nearly everyone.

More for Retirement

One significant change is that retirees get an extra year and a half to grow their IRA and 401(k) accounts before RMDs must begin. RMDs from an IRA or 401(k) plan must begin by age 72, up from age 70 1/2. This doesn’t apply if you turned age 70 1/2 before 2020.*

One exception is you don’t have to take RMDs from an employer’s retirement plan until you stop working, unless you own at least 5% of the company. You can also contribute to an IRA past your RMD date as long as you have work income to offset the contribution. Previously, you had to stop contributing by age 70 1/2, even if you continued to work.

More workers can contribute to 401(k) plans, too, starting in 2021. Part-time employees who worked at least 500 hours in each of three straight years (and reached age 21 by the end of the period) are eligible to contribute. And 401(k) plan participants should expect new disclosures estimating their lifetime income from their plans, while they may possibly see annuities as new plan options.

Other Changes

One change some IRA owners might not like is the elimination of the so-called “stretch” provision of inherited, non-spousal IRAs. Previously, non-spouse beneficiaries could stretch an inherited IRA over their lifetimes. Now, they must distribute all inherited benefits within 10 years of the original owner’s death.** There are exceptions to the new rule, including the IRA owner’s spouse and minor children, beneficiaries who are disabled, chronically ill or less than 10 years younger than the deceased.

The SECURE Act added some other wrinkles, allowing up to $5,000 in penalty-free distributions from IRAs and certain other plans, if amended within a year of a qualified birth or adoption and up to $10,000 from a 529 plan to pay for student loans.

*The CARES Act suspends the RMD requirement for 2020. Employer sponsored retirement plans may permit through plan amendment.

**Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 1/2, may be subject to an additional 10% IRS tax penalty.