The SECURE Act was passed into law in 2019 under then-President Donald Trump, but it’s effects are still being digested amongst savers and financial professionals. Dubbed the ‘Setting Every Community Up for Retirement Enhancement’ Act, the bill added provisions that change the way Americans use their retirement funds like 401(k) plans and IRA, as well as education saving vehicles like 529 plans. Many of these changes will go unnoticed, but here are the alterations most likely to affect American retirement savers.

End of the Stretch IRA

Inheritors of IRAs take a bit of a hit with the passage of this law. Under previous regulations, a qualified beneficiary who inherited an IRA can “stretch” the distributions over the course of their projected lifetime. For example, if you inherited an IRA from a parent at age 35, you could draw down that account based on the life expectancy tables provided by the IRS.

The stretch IRA is now gone though. While spouses can still use their lifetime projections to draw down inherited IRAs, non-spouse beneficiaries must draw down the entire account within 10 years of inheriting it. This can create tax headaches should you have a large account balance that needs to be dwindled down strategically. Consult with an advisor on the best way to draw down an IRA if you should be so lucky to inherit a large one.

Later Required Minimum Distributions (RMDs)

Here’s a benefit that everyone can enjoy. RMDs don’t apply to Roth IRAs, but they do apply for 401(k) plans and traditional IRAs. The previous age when RMDs kicked in was 70.5, which meant a retiree MUST begin drawing down their retirement accounts six months after their 70th birthday. Failure to take proper RMDs would result in penalties and tax concerns. However, the SECURE Act raised the RMD age to 72 across the board.

Employer Benefits For Setting Up 401(k) Plans

The main goal of the SECURE Act was to guarantee fair retirement planning and open access to tax-advantaged accounts to those who previously were shut out. Many of the bill’s provisions benefit savers using these vehicles, but employers also got a boost from the bill.

Under the SECURE Act, the tax credits for setting up a workplace retirement plan like a 401(k) or SIMPLE IRA were increased. A $500 tax credit is now available for employers who set up a retirement plan for the employees with automatic enrollment. Additionally, the rules for “safe harbor” 401(k) plans were altered to increase wage requirements from 10% to 15%. Finally, employers were encouraged to allow annuities into their sponsored 401(k) plans since the threat of legal liability no longer falls on the employer should the annuity provider default.

Other 401(k) Changes

The changes made to 401(k) plans don’t just benefit employers either. The SECURE Act pushed back 401(k) RMDs from 70.5 to 72 like traditional IRAs, but also tweaked the rules to allow part-time workers to participate. Any employee who logs 1000 hours per year or 500 annually over three years is now eligible to contribute to a 401(k) plan through their place of business.

Another change gives savers more flexibility when tapping their funds. If you’re planning on having or adopting a child, you can now hit your 401(k) account for a $5,000 penalty-free withdrawal. Any money withdrawn for this purpose can be re-contributed back into the account later without affecting your contribution limit either.

Finally, 401(k) account holders now have the option of adding annuities to their portfolio. Previously, only mutual funds could be owned in a 401(k) account. Of course, annuities are complex financial instruments that aren’t for everyone. Consult with your advisor before putting annuities into your 401(k) account.

529 Plan Changes

Finally, 529 plans are getting a tweak that benefits those holding student debt. A 529 plan is a tax-deferred savings vehicle that provides tax breaks if the funds are used for qualified education expenses. Previously, this only included direct costs like tuition, books, and other higher education expenses. Thanks to the SECURE ACT, a 529 plan can now be used to cover a portion of your student loan debt. Student borrowers now have a lifetime limit of $10,000 for which they can tap 529 plans to pay loans. This $10,000 will be a tax-free distribution at the federal level, but individual states may have different rules regarding taxation.

Disclosures

The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.

The content provided herein is based on our interpretation of the SECURE Act and is not intended to be legal advice or provide a tax option. This document is a summary only and not meant to represent all provisions within the SECURE Act.