What Is The SECURE Act and How Does It Impact Retirees?

The “Setting Every Community Up for Retirement Enhancement Act” or SECURE Act is now in effect. The Act was signed into law on December 20, 2019, and took effect on January 1, 2020. 

The bipartisan SECURE Act was designed to make integral changes to retirement savings vehicles, including employer-sponsored plans and IRAs in the effort to extend the opportunity for people to contribute to their retirement savings. 

As with any new piece of legislation, there are benefits and drawbacks. Let’s take a look at some of the key points of this law and how it will impact you. 

Updates to IRAs

Individual retirement accounts, IRAs, are an important savings vehicle for many pre-retirees. The SECURE Act has introduced several new rules concerning IRAs, namely the change to required minimum distributions, RMDs. Previously, retirees had to take RMDs in the year that they turned 70 ½, but the Act has increased the age limit to 72, extending the time for retirees to save money. 

The Act has also eliminated the maximum age rule for contributing to IRAs. Once someone turned 70 ½, they were unable to make contributions to IRAs, but now you are able to contribute at any age, offering more freedom and flexibility to your savings plan.

For new parents, the law permits an individual to take a qualified distribution of $5,000 from an IRA or an eligible defined contribution plan free of the 10% early withdrawal penalty. This stipulation applies to both the birth and adoption of a child. 

Another important change to IRAs is the Stretch provision for Inherited IRAs. This popular feature allowed beneficiaries of inherited IRAs to withdraw funds over the course of their lifetime. 

Now, the SECURE Act states that the beneficiary needs to withdraw all of the funds in the account within 10 years, causing big tax implications. There are, of course, exceptions to this new rule. Spousal, disabled, chronically ill, and minor children beneficiaries may qualify to sidestep the 10-year provision. The elimination of “the stretch” may change the way you organize aspects of your estate plan. We would love to speak with you about different ways to prioritize your legacy planning in conjunction with this new provision. 

Updates to 401(k)

The SECURE Act has also taken steps to improve employer 401(k) plans. Now, it is easier for small businesses to offer 401(k) plans to their employees by increasing the cap that allows them to automatically enroll workers in the plan to 15%. There is also a tax credit available for small business owners who do have automatic enrollment. 

The Act has also reduced restrictions on annuity provisions in 401(k) plans, leaving employees with the task to be more vigilant in their retirement planning efforts. These reduced restrictions could present an issue particularly if the annuity provider becomes unable to meet their financial obligations. 

Updates to other accounts

Another interesting feature of the SECURE Act is the ability to use funds in a 529 account to make qualified student loan payments up to $10,000. 

The bottom line

Whenever there are major changes to tax law, it is important to speak with your financial advisor to see how those changes will impact your current financial plan. Your financial wellbeing is of the utmost importance to us here at Legacy Wealth and we want to ensure that your plan continues to work for you. Schedule a 15-minute call with us to learn more about the changes you could make to your retirement savings plan.