The Secure Act – Key Provisions Affecting Retirement & College Savings Plans

Posted on February 5th, 2020


Retirement plan legislation passed by Congress effective 2020 includes changes affecting millions of American retirees. The Setting Every Community Up For Retirement Enhancement Act, known as the Secure Act, was signed into law by the president on December 20th. Provisions of the law are intended to facilitate retirement savings for small company workers, offer additional distribution options for 401(k) participants, redraft inherited IRA rules, and increase the required minimum distribution age on IRAs.

Inherited IRAs / Stretch IRAs

Rules surrounding the distribution of funds from an Inherited IRA have changed by accelerating the distribution and taxation of Inherited IRA funds going to non-spouses. Those most affected by the new rules are retirees with generous IRA balances intending to leave funds to their children and grandchildren. Also referred to as Stretch IRAs, inherited IRAs have allowed IRA beneficiaries to stretch distributions and taxes over an extended period of time.

A current rule that will remain the same is allowing a spouse to rollover their deceased spouse’s IRA to a spousal IRA and take Required Minimum Distributions (RMDs) based on their life expectancy. Inherited IRA rules will be modified by the newly imposed rules affecting non- spousal beneficiaries such as children and grandchildren, the most common types of inherited IRA beneficiaries, who will need to take distributions on the entire balance within 10 years.

A challenge for inherited IRA beneficiaries is the tax implication of accelerated distributions over a much shorter time period. Some beneficiaries may also run the risk of falling into a higher tax bracket, especially if they are working.

Traditional IRAs

The 70 1/2 age limit for Traditional IRA contributions has been repealed, meaning that as long as you have earned income from working, you may contribute past age 70 1/2. The repeal is applicable to contributions made for tax year 2020 and thereafter, not for tax year 2019.

RMDs

The required minimum distribution (RMD) age for IRAs has been raised to 72 from 70 1/2. The new RMD age applies to those who turn 70 1/2 after December 31, 2019.

401(k) Plans

Small businesses are encouraged to set up plans for their employees by increasing the cap under which employees are automatically enrolled in a plan at 15% of wages. This provision is called a safe harbor.

Part-time employees who work either 1,000 hours annually or have three consecutive years with 500 hours of service are eligible for a 401(k) plan.

Annuities will now become an option for employees taking retirement distributions from their 401(k) plan, providing consistent income similar to how pension plans used to decades ago.

529 Plans

Qualified student loans may be repaid with 529 plan assets up to a maximum of $10,000 annually. Parents may also use 529 assets for the birth or adoption of a child, up to $5,000 per year.

Sources: https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SECURE%20Act%20section%20by%20section

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