What Is the SECURE Act and How Does It Affect Retirement Planning?

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed by the President on December 20, 2019 and became effective on January 1, 2020. The SECURE Act made some very significant modifications to the taxation of retirement plan benefits and the related rules.

One of the most significant changes the SECURE Act brought was the elimination of the “stretch” IRA. Where previously a designated beneficiary of an IRA (other than a surviving spouse) was able to withdraw an inherited IRA over the designated beneficiary’s life expectancy, now that designated beneficiary must withdraw the inherited IRA over no more than a 10-year period. The rules with respect to the designated ability of the beneficiary/surviving spouse to roll the IRA over to her own IRA did not change.

The death of the stretch-IRA garnered most of the headlines when the SECURE Act was passed, however, there are number of other provisions of the SECURE Act to note, all of which are actually beneficial.

The following are the highlights of those key changes.

1. IRA Contributions After 70 ½

Previously, contributions to regular IRAs were prohibited in any year after the individual attained age 70 ½. The SECURE act changes this and provides that individuals can now make IRA contributions after 70 ½, but the $100,000 limit on qualified charitable contributions from an IRA is now reduced dollar-for-dollar for the contributions made after reaching 70 ½.

2. Age for Required Minimum Distributions (RMDs) raised to 72.

Prior law required RMDs to begin at age 70 ½.  The SECURE Act raised the age to 72.

3. Part-time workers.

Part-time workers employed long term can now join a company’s 401(k).

4. 529 plans.

The SECURE Act allows people to use 529 plan distributions to repay student loan debt, up to $10,000 in a lifetime per beneficiary.

5. Birth or Adoption Expenses.

Parents can now withdraw from their retirement plan up to $5,000 per parent penalty-free for the birth or adoption of a child. The distribution can be made from an eligible retirement plan to a parent made during the one-year period beginning the date on which the child is born or on which the legal adoption of an eligible adoptee (meaning, the adoptee must not be related to either parent (i.e., no second adoptions/adoption of spouse’s child) and must be either under 18 years of age or is physically or mentally incapable of self-support) is finalized.  The parent may, but need not, repay the distribution in addition to any other contributions the individual is entitled to make to the plan. This is not a loan. Individuals should contact their plan for more information on what the plan requires to pay the distribution back in the future.

So not all of the changes that the SECURE Act brought were negative.  While the death of the stretch IRA will reduce the income tax deferral that designated beneficiaries enjoyed, the changes outlined above will help to soften the blow.

The Trusts and Estates Group at Levenfeld Pearlstein is available to discuss how the SECURE Act may impact you. Contact us here for more information on the SECURE Act or any other retirement planning questions.