6 Changes From the SECURE Act That You Should Know About

What we’ll cover:

• For those turning 70½ in 2020 and beyond, the RMD age has been bumped to 72
• There’s no longer an age cap for making contributions to your IRA – as long as you’re working you can contribute 
• Some part-time employees may be able to participate in their workplace’s 401(k) plan
• You can now withdraw up to $5,000 penalty-free from your 401(k) or IRA to pay for expenses for the birth or adoption of a child
• 529 plans may now be used to pay off student loans, along with other educational costs

2020 brought a number of changes to the nation’s retirement system. The SECURE (Setting Every Community Up for Retirement Enhancement) Act, passed by Congress and signed into law in December 2019, has been hailed as making some of the most significant changes to the nation’s retirement system in more than a decade.

The new law has provisions that may affect nearly everyone from a savings or retirement standpoint, including parents, part-time employees, retirees, students, and those that inherit retirement assets. Here’s an overview of some of the key provisions and how they may impact you.

1). Required minimum distributions (RMDs) now begin at 72

Old law: You generally had to start taking withdrawals from your tax-deferred Traditional and SEP retirement accounts once you turned 70½.

New law: You don’t have to take those withdrawals (called required minimum distributions, or RMDs for short) until you turn 72. However, RMDs are not required in 2020 due to the CARES (Coronavirus Aid, Relief, and Economic Security) Act. Learn more about how the CARES act could help you.

Who’s affected: Those who turn 70½ in 2020 or later.

Bottom line: If you turn 70½ in 2020 or later, you don’t need to take your RMDs until you turn 72. However, if you turned 70½ before December 31, 2019, you still need to take your RMDs starting in 2021. Otherwise, you risk a hefty 50% tax penalty on the portion you neglected to withdraw.

It’s important to note you can still tap into your retirement funds at age 70½; the delay simply affects when you have to make withdrawals. And that delay might give your retirement savings extra time to grow.

2). You can make IRA contributions as long as you are working

Old law: You can’t contribute to Traditional IRAs once you turned 70½.

New law: You can contribute to a Traditional IRA as long as you’re working (even if you’ve reached 70½) starting with the 2020 tax year. 

Who’s affected: Those over 70½ years old with earned income, such as wages or self-employment income.

Bottom line: You have the opportunity to add to your retirement accounts for longer – as long as you’re still working. There’s no more cut-off date based on age. Just know you will still be required to take RMDs once you turn 72, starting in 2021.

3). Long-term, part-time employees may be able to join their company’s 401(k) plan

Old law: Employers with workplace retirement plans could offer them only to employees with 1,000 or more hours of service within a 12-month period.

New law: In addition to those employees covered under the old law, employers with 401(k) plans will also be required to offer them to employees working at least 500 hours a year for three consecutive years. The three-year measurement period begins in 2021, with part-time employee participation beginning in 2024. 

Who’s affected: Part-time employees, but not contractors or gig workers, who aren’t classified as employees.  

Bottom line: Long-term, part-time employees will have more opportunity to save through workplace retirement plans in the future. You can check with your employer to see if this applies to you.

4). Inherited IRA and defined contribution plan distributions generally must be now taken within 10 years

Old law: If you inherited an IRA or defined contribution plan, you could spread the withdrawals of these funds over the course of your life; this “stretching out” of payments gave way to the nickname “stretch IRAs” for these inherited accounts.

New law: If you inherit an IRA or defined contribution plan (e.g., a 401(k) account) from someone who passes away on or after January 1, 2020, you’re likely going to have to take all the money out of that account within 10 years. There are some exceptions (including if you’re a surviving spouse, minor child, disabled/chronically ill or no more than 10 years younger than the decedent), so check with a tax or financial professional to see if this applies to you. 

Who’s affected: Those who inherit retirement accounts in 2020 and beyond.

Bottom line: The new withdrawal schedule could generate significant taxable income for inheritors, potentially pushing them into a higher tax bracket. If assets remain after 10 years, inheritors face a tax penalty equal to 50% of the undistributed amount.

5). Account holders can withdraw up to $5,000 from their retirement plans with no penalty upon the birth or adoption of a child

Old law: If you took an early withdrawal from an IRA or 401(k) plan to cover adoption or birth expenses, you generally would have had to pay a 10% early withdrawal penalty, plus applicable income tax.

New law: You can now withdraw up to $5,000 from an IRA or 401(k) plan to pay for qualified adoption or birth expenses and not have to pay the early withdrawal penalty (though you’ll still be subject to income tax). The new law also permits you to repay these amounts into the plan or IRA.

Who’s affected: Parents adding a new child to their family.

Bottom line: Parents will have a new penalty-free source to tap into to cover expenses of adding a new child to their family if needed. Keep in mind that while the new law does away with the penalty, distributions are still subject to income tax. Parents may also want to consider the potential downside of withdrawing from their future savings. 

6). Not related to retirement, but you can use 529 plans to pay for up to $10,000 in student loan debts

Old law: Using funds from a 529 college savings account to repay student loans was not permitted.

New law: You can use up to $10,000 from a 529 college savings account to repay student loans. The law also allows 529 plans to be used to cover the costs of registered apprenticeships.

Who’s impacted: Parents, students and others who have 529 accounts. 

Bottom line: You can now use some of your family’s 529 savings to pay off student loan debt for you or a sibling.

And there’s more 

These are just some of the provisions from the new SECURE Act that could impact your workplace retirement savings and college savings plans. There’s also a provision that offers tax incentives to small businesses to set up retirement plans for their employees. You also might see more annuities offered in your company retirement plan as a result of certain changes in the law designed to facilitate lifetime income options. Check with a tax professional to see if there are any additional provisions that could help you save.