What is the Secure Act of 2020?

What Is the SECURE ACT?

The Secure Act was signed into law December 20, 2019, and became effective January 1, 2020. The new law changed required minimum distributions (RMDs), contribution rules, college planning opportunities and many more. The most devastating issue for savers is the elimination of the stretch concept for your beneficiaries.

SECURE ACT HIGHLIGHTS

• Makes it easier for small businesses to offer their employees 401(k)s by providing tax credits and protections on collective multiple employer plans

• Allowing retirement benefits for long-term, part-time employees

• Removing maximum age limits (formerly 70 ½ ) on retirement contributions

• Raising the required minimum distribution (RMD) age to 72 from 70 ½

• Allowing penalty-free withdrawals of up to $10,000 from 529 education-savings for the repayment of certain student loans

• Revising components of the Tax Cuts and Jobs Act that raised taxes on benefits received by family members of deceased veterans, students and some Native Americans

Read on for a look at how the SECURE Act could affect your retirement planning.

More Opportunities for Long-Term Savings
The legislation allows for multi-employer 401(k) plans, meaning it would be less costly for small employers to start and maintain retirement plans for workers. It also permits part-time workers to participate in 401(k) plans.

Currently, employees can contribute to a traditional individual retirement account up to age 70 1/2. There are also limits regarding how much can be placed into the fund each year. For 2019, workers under age 50 can contribute up to $6,000. Individuals who are 50 or older can contribute up to $7,000. Under the SECURE Act, The age limit IS removed entirely, although income limitations for contributions would remain.

Under current laws, retirement account owners must begin to withdraw funds when they turn age 70 1/2. Now the required minimum distribution age for retirement accounts is increased from 70 1/2 to 72. This gives workers an additional 18 months to take advantage of the tax benefits provided with retirement accounts before beginning withdrawals.

New Parents to Withdraw
Under current law, you must be 59 1/2 years old to withdraw from a traditional IRA or 401(k) plan. If you take out funds earlier than that, you will usually have to pay a penalty of 10% on the amount withdrawn. However, there are several exceptions to this rule. Penalty-free withdrawals can be made for certain circumstances, such as large medical bills, a disability, a first home purchase and higher education expenses.

Under the SECURE Act, new parents can withdraw funds without facing penalties. The legislation permits withdrawals for qualified birth and adoption expenses. This is a positive for younger people who have a high-deductible medical plan and are shocked at the high out-of-pocket medical expenses related to childbirth. The limit on the distribution would be $5,000 and would need to be claimed within one year of the birth or adoption.

This provision might help individuals who don’t have funds in a health savings account or other savings account to cover the cost of a new addition to the family. At the same time, withdrawing funds early from a retirement account also means taking away the chance for money to grow tax-deferred during the next decades.

Inherited Accounts Will Need to be Distributed
Individuals who have an IRA or a defined contribution plan may be planning to pass the account on to a child or heir. Under current law, the after-death required minimum distribution rules permit a designated beneficiary to draw down the remaining plan benefits over the beneficiary’s life expectancy. This allows the child to stretch the value of the IRA and take advantage of potential tax breaks.

The new legislation allows heirs to continue to withdraw funds throughout their lifetime. Under the SECURE Act, on the death of an IRA owner or defined contribution plan participant, the individual beneficiary would be required to draw down his or her entire inherited interest within 10 years.

For example, if you are age 50 and inherit your father’s IRA when he passes away, you would need to distribute 100% of the assets during a 10-year period. That’s a change from the current law, which would let you distribute the assets during your life expectancy. If your life expectancy is age 84, you are currently able to stretch the distributions over a 34-year period. If you are working during that 10-year period, you will likely pay substantially more taxes on the IRA assets than if you had the ability to stretch those taxable distributions over a 34-year period.

There are certain times when the 10-year period would not apply, such as in the case of a spouse, as well as disabled or chronically ill beneficiaries. There are also exceptions in place for minors and beneficiaries who are not more than 10 years younger than the account owner.