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What the SECURE Act means for your retirement

Do you know that old saying, “don’t put all your eggs in one basket”? It’s the same when it comes to investing.

A U.S. Government building in Washington, D.C.

Fact Checked by: Matthew Schwartz, CFP®

The start of 2020 ushered in a new federal law that affects your retirement savings and retirement planning. On January 1, 2020, the SECURE Act, short for Setting Every Community Up For Retirement Enhancement (SECURE) Act, went into effect after President Trump signed it into law on December 20, 2019, following bipartisan support in Congress. 

As the name suggests, the SECURE Act aims to help more workers save for retirement by giving more people access to tax-advantaged workplace retirement plans and expanding retirement savings. 

The purpose of the new rules is to address what many have called a retirement crisis, due to the growing numbers of Americans who have inadequate savings for their retirement. This new law marks the most significant change to retirement legislation in 13 years, and impacts retirement plans and retirement savings. 

If you're wondering how the SECURE Act affects you and your retirement accounts, here are some of the major provisions. Out of the 29 sections in the bill, highlights of the SECURE Act include: 

  • Giving workers over the age of 70½ the ability to contribute to traditional IRAs
  • Pushing back the age of those who need to take required minimum distributions (RMDs) from 70½ to 72
  • Making it easier for small businesses to provide employee retirement plans
  • Eliminating the Stretch IRA, with some exceptions
  • Allowing parents to use 529 education savings plans to repay up to $10,000 in student loans

Removing the age cap on traditional IRA contributions for workers age 70½+

The previous age cap for making IRA contributions was 70½, meaning you could no longer add funds to a traditional IRA beyond age 70½, even if you were still working.  But since many people choose to work beyond full retirement age, the SECURE Act removed that age limit. 

Now you can continue to add to your traditional IRA account (up to the $7,000 maximum per year) for as long as you continue working—which more people are doing, by going back to work part-time after retiring from their full-time careers. 

This provision means you have a longer window to build up your retirement savings. However, this change begins for the tax year 2020, so it doesn't apply to 2019 contributions. But if you have stopped working, and you're between the ages of 70½ to 72, there's good news for you in the next section. 

Required Minimum Distributions (RMDs) change from age 70½ to 72

Since life expectancy has increased and Americans are working longer, the SECURE Act raised the age for taking required minimum distributions (RMDs) from age 70½ to 72.

That means if you turn 70½ in 2020, you're no longer required to withdraw funds from your traditional IRA or 401(k) until you turn 72.  

That extra 18 months means more time for Roth IRA conversions, which converts taxable money in your traditional IRA to a Roth IRA, where your withdrawals are tax-free. And since it's best to do a Roth conversion before you start taking RMDs, this change provides more opportunity to do so. (To learn more about Roth conversions and how they can increase your retirement income by lowering your taxes, check out this video.)

If you are 70½ and plan to take RMDs early, you may want to talk with your financial advisor about your withdrawals. (And if you turned 70½ last year and already started taking RMDs from your retirement accounts, we recommend speaking with your tax advisor about your situation for 2020.) 

Small business owners can more easily provide employee retirement plans

Another provision of the SECURE Act is giving small business owners the ability to offer less expensive retirement plans to their employees. 

The new rules simplify safe harbor 401(k) rules and increase the cap for automatic contributions to pension plans from 10% to 15% of employee compensation.

If you're a small business owner, you may now be able to join with other small businesses in offering retirement plans to your employees, and qualified part-time employees, through what is called Multiple Employer Plans or MEPs. The SECURE Act also gives a tax credit per year to employers who set up a 401(k) or SIMPLE IRA plan with automatic enrollment. 

If you're an employee of a small business and haven't been able to contribute to a workplace retirement plan before, the SECURE Act may now make that possible for you. Even part-time workers who work 1,000 hours in a year or at least 500 hours in 3 consecutive years are now eligible. Talk to your boss or HR person about the possibility of joining a company retirement plan. 

Elimination of the “Stretch IRA” 

Partly in order to pay for the above provisions, the SECURE Act removed the Stretch IRA, which was an estate planning strategy that allowed non-spouse beneficiaries to receive and "stretch out" the tax-deferred distributions from an inherited individual retirement account, or an inherited IRA. 

With the new rules under the SECURE Act, most IRA beneficiaries now have 10 years from the death of the account owner to distribute the account. There are exceptions, however, for surviving spouses, minor children, and beneficiaries who are less than 10 years younger than the deceased IRA owner. Talk with your advisor for more details. 

If you had planned on extending your distributions by doing a Stretch IRA for a non-spouse, you may want to revisit your beneficiary designations.  

Expansion of 529 education savings plans to repay student loans

If you or your family has leftover funds in a 529 education savings account, another benefit of the SECURE Act is that it allows parents to withdraw up to $10,000 from the 529 account over a student's lifetime to repay student loan debt.

The new law also allows for 529 plan funds to cover costs associated with homeschooling and specific registered apprenticeship programs. 

If you have questions about the SECURE Act and how it affects your specific retirement plan, please reach out. Our retirement advisors are here to talk with you for a no-obligation complimentary consultation.

References:  

Congress.gov

SECURE Act section by section

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