Several years ago, I made a big decision. I put a home improvement project upon myself without consulting my wife. Because — you know — surprises are fun! She was away on a girl’s weekend, and I decided to whitewash our fireplace (which takes up a quarter of our living room.) Upon her return, she saw my finished project. I asked her how she liked it and her response was: “I like the plants,” referring to two small (fake) succulents I bought at Hobby Lobby. After thirteen working hours and 1,000 or so bricks painted by hand, I was at a loss. Turns out, she was caught off guard! Eventually, after a few days, she did inform me how much she liked it. Sometimes, major changes in life and also in finance are like this — even if they turn out positively, it’s always good to know what to expect. The SECURE Act is one of these changes.
These changes were signed into law on December 20th of 2019 as part of the SECURE Act. Being that the new law came to be during the craziest part of the year, you may have missed how it affects you and your retirement planning. Let’s take a moment to hit some quick highlights of the pros and cons of the SECURE Act.
- The required minimum distribution starting age has been moved from 70 ½ to 72. Which, if you think about it, makes some sense. Most people stop celebrating half-birthdays when they turn five. If you turned 70 ½ in 2019 or before, you must stick with the current schedule. If you turned 70 ½ in 2020 or later, you get to wait for the age 72 schedule. Fellow blogger Eric Greenhow talks more about changes to how distributions work and also about inherited IRAs here.
- Employers will now have the option of signing up part time workers to their employer sponsored retirement plans. Employees who work 1,000 hours in a single year or have 500 hours in 3 consecutive years can be now added to the plan. This can be great news for college students and part time retirees, among others.
- Once changes move through all plans over the next couple of months, you will be able to withdraw up to $5,000 from your 401k to help cover the costs of having or adopting a child. Having children has only gotten more expensive over the years. This assists by removing the standard 10% pre-59 ½ withdraw penalty, but taxes would still be owed. (Note that this may provide quick financial relief, work with your financial planner on how this may affect your long-term retirement plan.)
4. 529 college savings accounts now allow up to $10,000 to be withdrawn to pay down qualified college loans without penalty. Keep in mind that the earmarked $10,000 is a lifetime limit for each beneficiary.
5. Stretch IRAs are becoming a thing of the past. Previously, when someone passed away and left their IRA or qualified tax retirement plan to an individual (other than a spouse) that person could take payments over their life expectancy. This helped defer the income tax consequence of taking the funds over many years, rather than a short period of time. Now, under the SECURE Act the beneficiary must take the funds out of the account within 10 years. My colleague Bill Slover provides some additional detail here on how Stretch IRAs are affected by the SECURE Act.
This is not a comprehensive list of everything that has changed with the SECURE Act but are some key points to note while you review your current financial plan. You can find more information on the SECURE Act on our Resources page. I believe the spirit of the new law is to encourage savings within the US and to keep up with changing times.
This is just more proof that in the world of finance continues to change—and I am here to help.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.