The SECURE Act Has Passed. What Does it Mean for Your Retirement?

In July of 2019, the House passed a new bill titled the “Setting Every Community Up for Retirement Enhancement Act,” or SECURE Act.¹ The Senate approved the bill on December 19, 2019, and it was signed into law on December 20 by President Donald Trump.

This sweeping bill offers several adjustments to our current laws surrounding saving and preparing for retirement. The SECURE Act is poised to: provide more part-time workers with the opportunity to participate in employer-sponsored 401(k) plans, adjust the age caps on traditional IRAs and increase access to tax-advantaged retirement savings accounts. Below we’re outlining the most prominent changes of this new act and how they may affect your own retirement.

Change #1: Minimum Distribution Age for Retirement Accounts

Previously, when someone reached age 70½, they were required to begin withdrawing money from their retirement accounts. The SECURE Act has adjusted this minimum distribution age to 72.¹ If you have not already turned 70½ prior to 12/31/2019, this allows your retirement accounts to mature for an additional year and a half. Depending on how much you have accumulated in your account(s) thus far, this additional 18 months could have a significant impact on your retirement savings.

Change #2: Penalty-Free Withdrawals for Qualified Births & Adoptions

Section 113 of the SECURE Act introduces a new exception for those who seek early distributions. You may now withdraw from your retirement accounts penalty-free for "Qualified Births or Adoptions." New parents, whether through birth or adoption, are allowed to withdraw up to $5,000 from their individual retirement accounts. In order to make a penalty-free withdrawal, new parents must do so within one year of the birth or adoption.¹

Notably, the exception applies on an individual basis. Meaning, if both of a child’s parents have available retirement assets, each can make a Qualified Birth or Adoption Distribution of up to $5,000 for each child born/adopted.

Change #3: Required Withdraw Timeline from Inherited Retirement Accounts

Under the new act, beneficiaries who have inherited a retirement account will be required to withdraw the amount in its entirety within 10 years of receiving the account. This can be done in any of the ten years if the full amount is distributed by the tenth year. Previously, inheritors were given the opportunity to withdraw the amount over their life expectancy. With this change, there’s the possibility your tax obligation could go up since you are required to withdraw more from the account over a shorter period of time, eliminating the “stretch IRA” for many beneficiaries. There are certain groups of people who are exempt from this rule:

• Spouses of the deceased
• Beneficiaries who are disabled or chronically ill (must pass government standard)
• Certain minors (those children of the original retirement account owner). But only until they reach the age of majority, at which point they have 10 years from the age of majority to distribute the full amount of assets
• Individuals who are not more than 10 years younger than the decedent¹

NOTE: If you have a Trust named as the beneficiary of an IRA or other retirement account, it is important to have a conversation with your Estate Planner and Financial Planner to see if it makes sense to keep that Trust as beneficiary, as there are some serious planning implications with this change to the withdrawal timeline.

Change #4: Eliminating the Age Limitations on Contributing to IRAs

Previously, individuals were no longer eligible to contribute to their traditional IRA once they reached age 70½. Beginning in 2020, individuals of any age will be allowed to contribute to a Traditional IRA. The SECURE Act has eliminated the previous age cap, allowing people to continue contributing to their IRA for as long as they (or their spouse, if married filing jointly) have earned income.¹

This change is great news for seniors and could make a significant impact on their retirement savings, considering that more older Americans are making up a significant portion of the workforce. Today, 23.1 percent of the workforce consists of those 55 and older, compared to just 18.1 percent in 2008. And according to the U.S. Census Bureau, that percentage is projected to continue increasing to 25 percent by 2028.²

Change #5: Changes to 529 Plans

Section 302 allows 529 funds to be used for registered apprenticeships that include fees, books, supplies and required equipment. It also allows up to $10,000 of “Qualified Education Loan Repayments” (lifetime limit) as of 1/1/2018 for student loans.  In an anti-abuse coordination provision, any plan funds used to pay the interest on qualified student debt will render that interest paid ineligible for the above-the-line deduction for student loan interest under IRC Section 221. Please note that this only applies to Federal tax, so each state may decide if they will allow state penalty and state tax free withdrawals for student loan payoffs.

Change #6: Qualified Charitable Distributions (QCD’s) Still Allowed at Age 70½ 

The SECURE Act does not change the age at which an individual can make a Qualified Charitable Distribution from their IRA, which remains at age 70 ½ and now creates a unique 1- or 2-year window where IRA distributions may qualify as charitable contributions, but not as RMD’s (that haven’t yet begun). Individuals are allowed up to $100k of QCD’s per year. 

Change #7: Medical Expense Deductions

There are adjustments to the medical expense deduction threshold - back to 7.5%-of-AGI again for 2019 and 2020! It reverts to $10k in 2021.

Change #8: 401(k) Eligibility for Part-Time Workers

Before the SECURE Act, employees were required to work 1,000+ hours for an employer to be eligible to participate in a 401(k). Congress has recognized how important it is for all workers to participate in employer-provided retirement plans, so the SECURE Act includes additional provisions to help employers encourage their employees to increase contributions and to let (some) part-time employees participate when they were previously ineligible to do so.

Part-time employees must have worked 500+ hours per year (which averages out to 9.6 hours a week) for an employer for the past three consecutive years to be eligible. In addition, the employee must be 21 years of age or older by the end of those three years.¹

These changes for part-time workers apply to plan years beginning in 2021, but the SECURE Act does not require an employer to start ‘counting’ 500-hour years for the purposes of this new rule until 2021. That means that the earliest an employee would be eligible to participate in a 401(k) plan because of this change will be in 2024.

While there are additional changes being proposed in this new act, above are a few of the most impactful ways in which Congress’s SECURE Act could be making a difference in how you save for retirement.

Noteworthy Change – Lifetime Expectancy Table

Unrelated to the SECURE Act, beginning in 2021, the IRS is changing its life expectancy table for the calculation of RMD’s. Life expectancy has gone up and Congress saw fit to make the adjustments. This will result in slightly lower Required Minimum Distributions.