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SECURE Act: What You Need to Know

January 6, 2020

By Chris Van Buren, CFP®, CPWA®, Private Wealth Advisor

The Setting Every Community Up for Retirement Enhancement (SECURE) Act has been signed into law and went into effect January 1. This act may affect your retirement and I’ve highlighted the key changes you need to know.

Eliminates age restrictions on traditional IRA contributions

For tax years beginning in 2020, individuals can make contributions to a traditional IRA after reaching age 70½. Before the SECURE Act, you could not make contributions beginning in the year you turned 70½.

SECURE Act eliminates “stretch” IRAs

If an individual inherits a qualified retirement account from someone other than their spouse after December 31, 2019, they must fully withdraw from the account within 10 years. This change affects all qualified plans, including 401(k), 403(b), 457(b), 401(a), ESOPs, cash balance plans, lump sums from defined benefit plans and IRAs. If an individual inherited a retirement account prior to December 31, 2019, they are grandfathered into being able to use the “stretch” IRA strategy.

In my eyes, this is the biggest negative of the SECURE Act.

RMD age pushed to 72

Before the SECURE Act, most individuals were required to take minimum distributions (RMDs) from retirement accounts once they reached age 70½. The SECURE Act now delays this requirement to age 72. This applies to individuals who turn 70½ after December 31, 2019.

Penalty-free 529 Plan & IRA account withdrawals

Under the SECURE Act, up to $10,000 of 529 plan money can be used to pay off student debt. The $10k is a lifetime amount—not an annual limit. Any student loan interest paid for with tax-free 529 plan earnings is not eligible for the student loan interest deduction.

Parents can now take up to a $5,000 penalty-free distribution from their retirement accounts within a year of the birth or adoption of a child. Income taxes must be paid on the withdrawal but the 10% penalty, if younger than 59½ years old, will be avoided.

The legislation is making it easier for smaller employers to offer retirement plans.

Multiple Employer Plans (MEPs) allow the creation of pooled retirement plans with the intent to be more economical for small companies and beneficial to their employees.

Pension plans are becoming more obsolete so 401(k) plans will be adding variable annuities with an income guarantee to replicate a feature of old-fashioned pension plans.

Annuities are notorious for high fees but in larger plans, you will likely see fee compression which will only benefit investors. Employers are also now allowed to increase the automatic enrollment savings rate to 15% up from the 10% cap today.

In addition, starting in 2024 part-time employees working more than 500 hours a year for at least three consecutive years can get access and contribute to their employer-sponsored 401(k) plan. However, these employees will not be required to receive matching contributions from their employer.

In summary, outside of eliminating the utilization of the “stretch” IRA, I believe the SECURE Act has improved our retirement landscape.

Please reach out to your financial advisor for questions on how these changes may directly impact you.

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